Corporate Profile Contents Financial Highlights Significant Events Chairman s Letter Operations Review Financial Review

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2 CORPORATE PROFILE Orient Overseas (International) Limited ( OOIL ), a company with total revenues in excess of US$3.2 billion, has three principal business activities: container transportation and logistics services, ports and terminals and property development and investment. Listed on The Stock Exchange of Hong Kong, the OOIL Group has more than 160 offices in 50 countries. Orient Overseas Container Line Limited, operating under the trade name OOCL, its wholly owned subsidiary, is one of the world s largest integrated international transportation, logistics and terminal companies, and is one of Hong Kong s most recognised global brands. OOCL is one of the leading international carriers serving China, providing the full range of logistics and transportation services throughout the country. It is also an industry leader in the use of information technology and e-commerce to manage the entire cargo process. OOIL Group s property development and investment division focuses on sizable and quality investments, primarily in China, with the potential for solid and consistent returns. It has an eight percent interest in Beijing Oriental Plaza, one of Beijing s most prestigious commercial and office developments and owns Wall Street Plaza in New York City. Its key focus is on residential property development in cities in China that have a higher per capita GDP, superior urban infrastructure and high overseas Chinese investment. It has a number of residential developments in Shanghai.

3 Contents Corporate Profile Contents Financial Highlights Significant Events Chairman s Letter Operations Review Financial Review Board of Directors Shareholder Section Financial Calendar Shareholder Information Corporate Governance Notice of Annual General Meeting Report of the Directors Report of the Auditors Financial Statements Consolidated Profit and Loss Account Consolidated Balance Sheet Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Accounts Segment Information Principal Subsidiaries and Jointly Controlled Entities Major Customers and Suppliers 10 Years Financial Summary Other Information Fleet and Container Information Terminal Information Property Information Corporate Information 1

4 Financial Highlights Turnover Profit Attributable To Shareholders Earnings Per Ordinary Share 3,500 3,000 2,500 2,000 1,500 1, US$M US$M US Cents Debt To Equity Net Debt To Equity Net Asset Value Per Ordinary Share Ratio Ratio US$

5 Significant Events February OOCL Xiamen, one of the four chartered-in vessels of OOCL in 2003, arrived in Hong Kong from the Port of Ningbo. 1 March OOIL announced a profit after taxation and minority interests of US$51.7 million for the year ended 31st December Hapag Lloyd, OOCL and P&O Nedlloyd announced the start of a new dedicated Intra-Asia service, plying between Japan, Thailand and Vietnam. April OOCL celebrated the christening of OOCL Shenzhen at Koji Island, Korea. OOCL Shenzhen was the largest vessel ever built by Samsung Heavy Industries Co., Ltd. 2 OOCL launched a new China/Straits Service to enhance its service network for China. 2 May OOCL Montreal, a 4,402 TEU Ice-strengthened vessel, was delivered to OOCL from Daewoo Shipbuilding and Engineering Co. 3 A completely new service, the Australia China Express (ACE) service was inaugurated by China Shipping and OOCL, replacing the COZ ( China Shipping, OOCL and Zim ) service in serving customers transportation and logistics needs between China and Australia. 3 June OOCL Sydney, a chartered in brand new container vessel of 2,762 TEU, joined the new Australia China Express (ACE) service, jointly operated by OOCL and China Shipping, linking major ports in Australia with the growing markets of China, Hong Kong and Taiwan

6 Significant Events July OOCL Long Beach, the second of the ten 8,063 TEU SX Class vessels delivered to OOCL from Samsung Heavy Industries. 5 Excavation work for Phase 2B of Century Metropolis commenced. 5 August OOIL announced Interim Results on 20th August a profit before taxation of US$88.7 million as compared with US$4.1 million for the same period last year. OOCL (India) Private Limited, a wholly owned subsidiary of OOCL was established as the general agent for OOCL in India. 6 September OOIL completed an off-market share repurchase of 46,957,088 shares at a repurchase price of HK$9.8 per share (the Share Repurchase ). Following the completion of the Share Repurchase, all the repurchased shares were cancelled and the total number of issued shares of OOIL was reduced from 517,141,632 to 470,184,544. October 7 Occupation permit for Phase 2A of Century Metropolis were obtained

7 December OOCL signed an agreement with Samsung Heavy Industries for the construction of two 8,063 TEU (twenty-foot equivalent unit) SX Class post-panamax container vessels for delivery in OOCL won Best Main Line Operator at the fifth Lloyd s List Maritime Asia Awards ceremony, held in Shanghai on 4th December. 8 9 OOIL announced the following appointments with effect from 1st December 2003: 9 1. Professor Richard Yue Chim Wong was appointed an Independent Non-executive Director of the Company; 2. Mr Philip Yiu Wah Chow was appointed a Director of the Company; and 3. Mr Tsann Rong Chang, a Director of the Company, was appointed Vice Chairman. 5

8 Chairman s Letter RESULTS FOR has turned out to have been one of if not the best year to date for the container liner industry. To the surprise of most, and from very uncertain beginnings, the market gathered strength at an unprecedented pace during the course of the year. At the interim stage of 2003, I voiced concerns that the nascent recovery of the world s major economies remained frail and that the significant increases in both container liftings and average freight revenues during the first half of 2003 were greatly assisted by the weakness of the comparable period of 2002 and might not be sustained into the second half of the year. These concerns turned out to have been unfounded with the growth in volumes and the increase in rates having, in the event, accelerated during the second half of Equally, the perennial fears that the growth in the volume of containers moved would be insufficient to absorb the effects of the introduction of a significant level of newbuilding tonnage were also groundless. It should be noted, however, that the capacity increases were sufficient to alleviate the upward pressure on freight rates to the extent that in the case of the Trans-Pacific for example, they remain below the levels achieved in 1999 and Against this background of beneficial market conditions, and aided by both a continued focus on cost control and the benefits deriving from the economies of scale which accrue from our fleet expansion, I am pleased to be able to report a record level of performance by Orient Overseas (International) Limited and its subsidiaries (the Group ) for the year of 2003 as a whole. The Group recorded a profit before tax and minorities of US$353.3 million for the financial year A profit attributable to shareholders of US$329.0 million was 6

9 recorded which represents an increase of depths of earlier in the year and container been made to IRIS-2, our enterprise system, 536% over the attributable profit of volumes had begun to show much higher to include interface capabilities with US$51.7 million which we recorded in growth rates. This continued through into CargoSmart, e-payment and Scheduling This is a remarkable achievement but must 2003 and, if anything, accelerated as the Smart, and to cater for Bills of Lading and be viewed in the light of the prevailing year progressed. Coupled with a lower rate Manifests issued by N.V.O.C.C.s. It s market economic and market conditions which have of tonnage increase than had been forecast, leading functionality has once again been produced a set of circumstances almost the supply and demand balance changed its demonstrated by the fact that a second unprecedented in the history of the industry. bias to the extent that space became more licensing agreement has been signed to scarce and freight rates consequently firmer. allow use of the system by another major The Board of Directors recommends the container line. Both the first and this second payment of a final dividend of US12.8 cents I am pleased also to report that our container licensee conducted extensive exercises to (HK$1) per share to ordinary shareholders. terminal businesses in North America were identify suitable and available proprietary Together with the interim dividend, this all profitable for For various reasons systems. That both concluded that IRIS-2 represents a 566% over the total dividend this represents the first time that they have was their better and preferred solution paid for the financial year ended December all been profitable in the same year. Overall, demonstrates that no other system the four terminals, two in the Port of New compares favourably. York and New Jersey and two in the Port of The Directors are also recommending a Vancouver, achieved an increase of just over In 2003, CargoSmart, a provider of one of bonus issue of shares on the basis of one 7% in throughput, in terms of actual lifts, the most advanced portals for the ocean bonus share of for every 10 existing issued and an 11% rise in revenues per container container transportation industry, continued ordinary shares and have resolved to change handled. This translates into a 133% to strengthen its product range by adding the board lot size for trading in OOIL shares increase in net recurrent pre-tax income and enhancing features that complete the from 2,000 to 1,000. although this figure is distorted by the swing basic shipment cycle from booking through from loss to profit at Global Terminal in New to invoicing, thereby extending its service The result for the year as a whole is much York. However, we expect these levels of to help a broader segment of customers and superior to that predicted in the middle of profitability to be maintained or bettered their associates manage their shipments 2003 and the forecasts for the trading during across multiple carriers. The new products environment during 2004 remain optimistic. and enhancements continue to assist As hitherto we continue to make those customers to plan, process, monitor, and As hitherto, the Group s operations remain investments in these terminal facilities share their shipment information more organised into two distinct operating entities necessary to upgrade the equipment and to efficiently. to allow each the required independence maintain and improve the services we and ability to concentrate upon their provide to our customers. In addition we OOCL Logistics is the Group s logistics respective businesses. remain alert to the opportunities which, management division. Founded as a global although infrequent, do arise from time to freight services provider, OOCL Logistics Our International Transportation, Logistics time to invest in other terminal projects in today is a major global 3PL (Third Party and Terminals division enjoyed an which we see good prospects in terms of Logistics Provider) as well as an LLP (Lead unprecedented trading environment during the location and hinterland necessary to Logistics Provider). By combining leading as we experienced a much better produce the profitability levels required. edge IT solutions, with a full menu of supply and demand balance despite the substantial growth in capacity. During the second half of 2002 business confidence generally had started to recover from the During 2003 we have continued the development and scope of our automated IT platforms. Major enhancements have logistics services, it provides customers with integrated logistics solutions and manages multiple carriers, service providers and transportation modes with visibility and 7

10 Chairman s Letter event management capabilities. It offers a of the local development team and the term. Indeed, at the time of writing the wide range of value added services through continued brand name premium we have prospects for the longer term appear its worldwide network. While bearing the established in Shanghai. In addition, we brighter than they have for some time. In well-recognised OOCL brand name, OOCL began during the year to expand our the past, our concerns have traditionally Logistics is a neutral 3PL/LLP with the goal horizons a little to areas immediately outside been over the supply side of the equation to maximise value for its customers. It has a the Shanghai City limits, efforts which we with new tonnage generally available customer focussed service philosophy, believe will make a valuable contribution to between 18 months and two years of having technology driven operations and process the Group going forwards. placed an order. The present situation, oriented business practices. unique it seems, is that with all sectors of For our property investment business, we the shipping industry having of late been In line with the Group s overall goal of continue to believe that both China s entry enjoying exceptional levels of performance, significantly expanding its logistics services to the WTO and the gradual build up to the the shipyard order books are virtually full capabilities, OOCL Logistics is focused on 2008 Olympic Games will slowly but surely for probably the next 3.5 years. As such, end-to-end logistics solutions that maintain benefit all sectors of the Beijing property the supply side increases are fixed for a a high level of customer satisfaction through market. Beijing Oriental Plaza, in which the period much longer than is usually the case. consistent service quality. Information Group continues to hold an 8% interest, has With greater confidence therefore on the technology is at the core of modern logistics. yielded a modest but positive result at the supply side, concern has now switched more OOCL Logistics prides itself on its project level for the financial year ended to the demand side and the sustainability sophisticated, customer driven technology December 2003 and we look forward to a of the recent levels of container volume solutions. It continues to deliver advanced, growing contribution at the Group level in growth. It should be remembered that this integrated web solutions that support a full the future. Until such time, we continue to is very much an international business and range of transportation, warehousing, view the project as a long term investment. indeed, OOCL depends upon its base in information integration and management During 2003, the Group increased its Hong Kong for not more than 10% of its reporting requirements. To extend its IT percentage freehold ownership of the land revenues. China s accession to the WTO, the leadership, OOCL Logistics embarked on a underlying Wall Street Plaza from 66% to continuing process of containerisation and new IT initiative in 2003, building on the 95% at a cost of US$10 million. As at 31st the return to higher levels of global technology successes of the Group, which December 2003, the building was valued on economic growth all tend to suggest that aims to provide the engine to manage the an open-market basis at US$100 million, the presently better supply and demand entire logistics supply chain from which allowing for the capitalisation of the balance is set to remain with us for 2004 manufacturer to retailer. At the same time, amount spent to acquire the increased and perhaps beyond. More profound in its OOCL Logistics is continuing to build upon freehold interest, represents no change from effect at present perhaps is the process of its long-standing presence and expertise in the prior year. The gradual recovery in the globalisation. It would seem that the poorer China, a market we regard as having the New York property market has benefited macroeconomic conditions of the past few greatest potential and enormous demand for Wall Street Plaza, and we look forward to years in the world s major consuming logistics services. We intend to maintain our its continued and positive contribution to economies have placed increased pressure leadership position in China s logistics Group performance. on businesses, largely unable to influence market in the years to come. their revenues, to concentrate efforts upon The outlook for our core international their cost bases and to seek lower Our Property Development and Investment transportation and logistics businesses manufacturing and or assembly costs. This division returned a solid year in Despite the numerous issues arising due to SARS, the results of our development portfolio in Shanghai remained satisfactory. This can be attributed to both the experience remains positive. During the course of 2003 the supply and demand balance moved firmly in our favour and at the present time it is hard to find any data to suggest that this favourable situation will alter in the near has resulted in a shift of these processes to lower labour cost areas, namely the Far East and specifically China. The impact of these changes in trade patterns is a compound one since it not only generates increased 8

11 container movements to return the finished product back to its consumer market but also creates other movements, most notably in the Asian regional trades, in the transport of raw materials and components. This goes a long way potentially to explaining the very steep rise during 2003 in Intra-Asian container volumes. General freight levels at the time of writing remain firm on all our trade routes. Whilst for the Trans-Pacific, the all important negotiations of the annual service contracts remain in progress, we do not expect the outcome to demonstrate any softening in rates of which, during 2004, we shall enjoy the benefit for a full 12 months. Similarly we do not foresee any softening in our other trades and for our Intra-Asia services we may experience some unexpected strength in rates as it now appears that there is little if any extra tonnage available, in addition to the increase in trunk route vessels carrying regional cargo, to absorb the continuing volume increases. The Group and its employees also take seriously and take pride in responsible corporate citizenship. Recognising that the communities in which we live and work contribute to our success, we focus our community efforts on the provision of youth education, charity relief and cultural promotion. Every week, throughout the world, OOCL employees give to the community by participating in charity events, fundraising or by dedicating their time to ongoing acts of help or assistance. A major initiative is the Group s involvement in Project HOPE (Health Opportunities for People Everywhere) by assisting with the transportation of the latest diagnostic medical equipment and supplies to the Shanghai Children s Hospital, China, to allow those less fortunate children to receive the best medical care and attention possible. Other beneficiaries include cancer, diabetes and leukaemia funds in Hong Kong, Australia, Europe and the USA; children s homes in Hong Kong and France; food banks in the US and many others has been an exceptional year for the Group and I must pay tribute to the staff who have made this possible. OOIL has a full-time staff on land and at sea of over 5,000 people. It as a committed and stable workforce and the Group includes People as one of its Core Values. People Development, throughout the whole organisation, remains a cornerstone of corporate policy. Quality in service and products has always been the emphasis and now with our positioning as a knowledge based organisation as we continue our IT investment programmes, we place an even greater emphasis on the development of our people. We aim to provide an environment in which they may extend their personal horizons and realise their full potential in partnership with the Company as a whole. In line with OOIL s long tradition of giving back to the communities in which we live and work, the Tung OOCL Scholarship supports the education of youth. OOIL and The Tung Foundation together spend over US$1 million per year on educational scholarships for students in China and Hong Kong and for the children of employees globally. C C Tung Chairman and Chief Executive Officer Hong Kong, 19th March

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14 Operations Review INTERNATIONAL TRANSPORTATION, LOGISTICS AND TERMINALS 2003 began rather uncertainly. Although the growth in container volumes had picked up strongly during the latter part of 2002, concerns remained over the strength and durability of any US economic recovery, the problems within the other major economies, especially those entrenched and structural problems in Japan and Germany, and the sustainability of the fast growing Chinese economy. International Transportation and Logistics Volumes (teu) 2,264, % 2,687,545 Revenue (US$ millions) 2, % 2,969.6 E.B.I.T.D.A % Depreciation/Amortisation (100.2 ) +8.5% (108.7 ) E.B.I.T % Finance Expenses (24.4 ) -20.5% (19.4 ) Profit Before Tax % Tax & M.I. (4.2 ) +57.1% (6.6 ) Net Profit % 297.1

15 CONTAINERISED TRANSPORTATION during 2002, resulted in additional costs of which resulted from the service contract All trade routes achieved an appreciable US$10.0 million and higher charter and slot renegotiations in early 2002, to once again improvement in performance during the hire expenses represented a further increase resume a position as a significant contributor course of 2003 as volumes rose significantly year-on-year of US$37.0 million. to the overall OOCL profitability. A 12.1% and freight rates for most routes continued Additionally, we have suffered from the increase in liftings combined with a 22.0% their strong recovery. Overall liftings for devaluation of the US Dollar against the recovery in average freight rates per TEU OOCL rose by 18.7% to 2,687,545 TEU world s major currencies. In approximate resulted in a 37% increase in total revenues. which, combined with a 15.1% recovery in terms, any one cent upward movement of Liftings to the US East Coast experienced average revenues per TEU, resulted in a the US Dollar / Euro exchange rate the steeper increase at 18.4%. It should be 36.6% increase in total revenues to US$2.8 represents a US$1 million increase to our noted that the recovery began only from 1st billion. There were adverse movements on cost base. A one yen fall in the Japanese May 2003 as the new service contract year the cost side however. Variable costs per TEU Yen / US Dollar exchange results in a similar commenced. remained largely unchanged, being mainly cost increase in US Dollar terms. The overall terminal charges and the cost of third party load factor reduced slightly from 84.1% to The recovery in the Asia-Europe and Asia / transportation services. However, bunker 82.0% but remains a considerable Mediterranean trade routes has been as costs were 17% higher than in 2002, on an achievement when compared with the equally prominent. For 2003 a 20.8% rise average price per ton basis, resulting in total additional expenditure of US$61.4 million, US$21.4 million on a like for like basis after allowing for the fleet expansion which took place during the year. The 2003 resumption average 21.8% fleet expansion which took place during OOCL s Trans-Pacific trades achieved a significant turnaround from a small loss in in total liftings and a 35.4% recovery in average freight rates resulted in a 63.5% increase in total revenues. By comparison, liftings on the Transatlantic routes experienced a much more modest increase of our drydocking programme, postponed 2002, as a result of the unviably low rates of just 2.9% but, assisted by a general 13

16 Operations Review redeployment of some tonnage onto the to Australasia routes also experience strong vessels built by Imabari in Japan and are other two stronger main east-west trades, growth especially on the southbound trades. under long-term charterparty arrangements. average revenues per TEU rose by 13.5% Overall, 23.5% and 14.6% rises in liftings They were deployed within our Intra-Asian resulting in a 16.8% rise in total revenues. and average revenue per TEU respectively, and Australasian services. In May 2003, resulted in a 41.6% increase in total OOCL took delivery of the OOCL OOCL s Intra-Asia and Australasia revenues. Montreal, a 4,402 TEU ice-strengthened businesses experienced by far the greatest vessel for deployment in our North Atlantic volume increase at 31.1% and, assisted by Orient Overseas Container Line services between Europe and Canada. a marginal 2.2% rise in average revenue per Simultaneously, the OOCL Canada, our TEU, total revenues rose by 33.9%. This only modest rise in freight rates would suggest that during 2003, there was sufficient TOTAL LIFTINGS TOTAL REVENUES (TEU S) (US$OOO S) former 2,330 TEU ice-strengthened vessel, was delivered to her new owners under a pre-existing contract of sale. tonnage available on the charter market combined with additional trunk line vessel Trans-Pacific 771, % 865, , % 1,281,239 Asia-Europe/ In April and June 2003, OOCL took delivery capacity, to match the volume increases. However the very steep rise during the latter part of the year in charterhire rates for the medium to smaller size ships deployed Intra-Europe 355, % 406, , % 525,786 Transatlantic 270, % 278, , % 343,518 Intra-Asia/ Australasia 867, % 1,137, , % 604,657 All Services 2,264, % 2,687,545 2,017, % 2,755,200 from Samsung in Korea of the OOCL Shenzhen and OOCL Long Beach. Both were deployed in our Grand Alliance Asia- Europe services and were the first to be within these trades, would suggest that this supply is now, at best, limited with the potential consequence for 2004 that any continued strong rise in volumes will have a positive impact upon freight rates. Our Asia Between January and June 2003, OOCL took delivery of the OOCL Xiamen, OOCL Osaka, OOCL Sydney and OOCL Melbourne. All are 2,762 TEU delivered of what is now our programme of twelve 8,063 TEU SX Class vessels ordered from Samsung. In January and February 2004, OOCL took delivery of the OOCL Rotterdam and OOCL 14

17 Hamburg, numbers 3 and 4 in the series. has seen the development of a nationwide integrated whole rather than looking Numbers 5 and 6, the OOCL Qingdao network of regional distribution centres, separately at individual countries as and OOCL Ningbo will be delivered in warehouses and cross-dock operations, traditional shipping systems do. Its total April and May 2004 respectively. These giving it a presence and operational capacity will have been doubled to two vessels remain the largest containerships by capabilities in all key locations throughout billion objects by the end of the first quarter declared capacity yet delivered. Of the the strategically important China market It has already proved its worth in remaining six vessels in the series, two will Upon China s full accession to WTO, the respect of the 24 Hour Rule which be delivered during each of the first halves international and PRC domestic networks of requires carriers to deliver shipment of 2005, 2006 and OOCL Logistics will combine to offer information to the US Customs, with other customers a seamless global end-to-end jurisdictions either having already followed During 2003, OOCL also committed to logistics service. At the same time, its or about to follow suit, 24 hours before the long-term charterparty arrangements under unrelenting efforts in systems development container is loaded. Implementation was which a series of eight 5,888 TEU vessels, have been a major pillar in supporting ever simple since all necessary information was to be built by Imabari in Japan, will be demanding customer requirements. These already available from the moment of on- delivered, one in late 2005, three in early and other projects will together put OOCL line booking. It will again prove invaluable 2006, one in late 2006 and the remaining Logistics ahead of its competition. OOCL in the future if RFID (radio tag technology) three during the first half of These Logistics is posed for notable growth in the becomes standard to assist shippers in various newbuilding programmes are in line years to come. tracking all their individual shipments at all with our long term business plans. OOCL s internal organic growth plans, to be INFORMATION TECHNOLOGY times. This may be some way off however, since IRIS-2 already tracks all containers at supported by sustained profitability, remain The Group policy to continue investment in all times. in place and the further long-term its IT capabilities remains as a means of charterparty arrangements, together with achieving greater customer satisfaction and As one of the most advanced and the existing fleet of eight 5,560 TEU vessels cost efficiency. This further automation of comprehensive open software platforms in under medium-term charterparties which our processes continues to free staff from the industry, CargoSmart added Vessel begin to reach their first renewal dates from the constraints of day to day process Tracking and Invoices and Payments to its the middle of 2005 onwards, provide us with management to concentrate upon exception online functions. It also enhanced its product the flexibility we require to convert vessels management and the continuing range by providing offline methods of earmarked for fleet expansion into improvement and broadening of our conducting common shipper-carrier replacement tonnage should market customer services. It also allows us to reduce transactions, including shipping instructions, conditions so dictate. significantly the amount that we spend upon and it enhanced its bill of lading printing LOGISTICS service, documentation, administration and other communications with shippers while, capabilities with batch printing and secure printing on blank paper. CargoSmart and its In 2003, OOCL Logistics again achieved a at the same time, the budgeted outlay on technology partner Hewlett-Packard, also high growth of 31.5% in total revenues. It computer systems continues to fall as a renewed their long-term hosting agreement witnessed a significant expansion of its percentage of total revenues. The visibility for another three years, further customer base and greatly increased the created by and the flexibility of this object strengthening the technological foundation sophistication of its services. It continues to technology, on which the systems are and customer technical support delivery of pursue and support its dual strategic based, is such that it even allows shippers the company. By the end of 2003, initiatives of rapid business growth and continuous service quality improvement. A number of initiatives under its five-year business plan have registered satisfactory results. The China Distribution programme to change the destination of a container which is already in transit. It is currently the largest objects system in the world and holds over 800 million objects in its database and it looks at the world as an CargoSmart had grown to over 11,000 registered users transacting on a system that was being populated with an average of 215,000 new shipments a month. 15

18 Operations Review CONTAINER TERMINALS The two container terminals in Vancouver, Deltaport and Vanterm continued to enjoy volume growth in 2003 with a combined increase of 7% above 2002 in the throughput of containers. Although remaining profitable, the operating profits of these two terminals were not at the same levels as in the prior year due to increasing costs such as taxes, insurance, labour, meeting the ISPS code (International Ship and Port Facility Security Code) and the challenges resulting from handling a significant increase in rail import/export volumes. Although the customer mix changed somewhat from 2002, the overall increase was due in part to a number of factors. The two terminals both continued to build on their success at serving as a first port of call for Trans-Pacific carriers, at providing an alternative gateway to the US Midwest and at growing further in the Canadian import/ export marketplace. Further volume increases are attributable to certain existing customers having introduced additional services, the addition of new customers and to an extent, the continued diversion of traffic due to the labour disruption of the US West Coast ports in late The 7% increase in throughput over 2002 is still significantly positive growth building on the initial 26% growth experienced in the prior year as the two Vancouver terminals successfully secured a new customer base. New challenges experienced in 2003 included the additional costs and operational issues of handling the significant increase in rail volumes. The required co-operation and support of the railways is critical to ensure that these challenges are minimised. To meet the ongoing challenges to the overall capacity of Deltaport and Vanterm, several initiatives were undertaken to increase terminal capacity and to improve terminal efficiency and productivity in a cost-effective manner. These initiatives included a terminal expansion at Vanterm at a cost of approximately US$30 million, including the purchase of two 65-ton super post-panamax cranes and an increase in terminal and intermodal yard capacity and the purchase of a seventh gantry crane for the Deltaport facility to improve the turnaround time and free up additional berth windows. All new cranes will be delivered in early Discussions continue with the Vancouver Port Authority on the subject of a third, additional berth at Deltaport and the expansion of its container yard. Global Terminal in New Jersey, recovering from a difficult 2002, acquired new business in 2003 increasing its throughput by 132%. With the return of throughput to pre-2002 levels, Global s financial and operational performance has demonstrated a marked improvement. Having now completed its transition to a fully grounded mode of terminal operations using rubber-tyred gantry cranes, Global has significantly increased its terminal capacity. Coupled with other planned facility and service improvements, including the implementation of a new terminal information system, an Optical Character Recognition gate complex and the reduction of redundant labour and process practices, more efficiencies in operations and cost will be realised. Also, the planned deepening and extension of the berth length will position Global to acquire additional business and bring the terminal to its full potential. In addition, Global is actively pursuing with a local short-line railroad the implementation of a near-dock inter-modal service, moving yet further to meet its customer needs. Global s geographic location within the Port of New York and New Jersey is ideally suited to meet the increasing demands of container carriers by providing unrestricted access from the open sea, and therefore the shortest transit time, as compared with other facilities in the port. These attributes will insure the long-term ability of Global to maintain a customer base that will utilise the full capacity of the terminal. Howland Hook, on the New York side of the harbour and located on Staten Island, achieved its second consecutive year of profitability. While net revenues were down year over year based on a reduced volume of 25% versus the previous year, there were several key strategic projects which moved forward and the completion of a revised 16

19 lease arrangement with the Port Authority made 2003 a very positive year for this facility. The lease revision removed several million dollars of recorded debt and will significantly enhance the terminal s future financial position. The loss of a customer in the fourth quarter of 2002 was partially offset with the terminal regaining another vessel string from the same customer at the start of the third quarter in On a strategic note, construction on several key projects including on-dock rail, a 500 ft berth extension and channel dredging have all made significant progress. These three projects, with a combined cost of approximately US$600 million, are being funded by the Port Authority of New York and New Jersey together with the federal government providing much of the funding for the dredging, and will all be complete in mid-2005 and thereby increasing the facility s capacity by approximately 38%. Dredging of the approach channel also commenced in July 2003 and once complete this 18 month project will allow the facility to handle the largest vessels which call at the harbour. equipment, will significantly enhance the long-term value of this operation. During the coming year Howland Hook will also complete a corporate restructuring and going forward, the terminal will be reorganised as New York Container Terminal Inc., scheduled for completion during the first quarter of Complimenting this non-recourse investment, the terminal upgraded much of its terminal handling equipment and completed a contract for the acquisition of four new post-panamax cranes which will be on line in the third quarter of Taken together, these terminal improvements, combined with the new operating 17

20 Operations Review Operations Review PROPERTY INVESTMENT AND DEVELOPMENT PROPERTY INVESTMENT The Group continues its policy of selected investments of a size and quality which have the potential for solid and consistent returns. The Group retains its 8% interest in Beijing Oriental Plaza which has now been completed. The project consists of 117,000 sq m of retail space, 295,000 sq m of office space, a 500 room 5 star hotel and over 800 service apartments, in total some 585,000 sq m in gross floor area. While the project is now achieving modest profits at the project level, we do not expect this to contribute in the near term to Group profitability as a result of the accounting treatment. The total cash investment by the Group has been US$93.6 million. No further injection of equity will be required. Wall Street Plaza, the Group s investment property in New York City s financial district, started the year with a vacancy rate of 11% but a strong leasing programme reduced this to below 1% as 2003 drew to a close, significantly better than the 15% overall vacancy rate in the Downtown Manhattan office market. Furthermore, a majority of those tenants with leases due to expire in 2004 and 2005 and who collectively occupy 12% of the building, elected during 2003 to extend the terms of their respective leases by an average of five years. Wall Street Plaza remains profitable and is strongly positioned to ride out the current market downturn. In 2003, the Group purchased the freehold interest in a 8,053 sq ft parcel of land which accounts for approximately 36.5% of the site on which Wall Street Plaza is constructed. This purchase has brought the Group s freehold ownership of the underlying land to 95.1% and provides it with a better position and flexibility in forward planning for Wall Street Plaza. As at the end of 2003, the building was valued, on an open market basis, at US$100 million. This compares with a valuation as at the end of 2002 by the same valuer of US$90 million. The increase in valuation includes the newly acquired freehold ownership of the underlying parcel which was purchased for approximately the difference in the two valuation results. PROPERTY DEVELOPMENT The Shanghai residential real estate market has continued to grow and the luxury sector registered strong growth for We continue to be cautiously optimistic given the steep rise in the residential market over the past three years. However, the market continued to be supported by a number of factors including (i) the continued growth 18

21 in the underlying economy of Shanghai; (ii) the continued inflow of capital and businesses into Shanghai from both outer provinces and overseas; (iii) the continued discharge of pent-up demand; (iv) speculative buying and investment; (v) new plot ratio restrictions within the city centre; (vi) an active second hand market thereby further stimulating the primary market; and (vii) a further slow down in supply as resettlement guidelines become more stringent. Going forwards, the Government seems to be encouraging further home ownership in the mid and mid to low sectors of the market. It has announced plans to increase the mortgage ratio for these sectors to 85%, plans to lift the RMB100,000 ceiling on provident fund usage by home buyers and has announced a preferential interest rate subsidy policy for lower income buyers. It has also place significant emphasis on building subway and elevated light railway links in and around the city. Overall, although the market has risen less dramatically during 2003 than previously there continues to be concern over the building of a real estate bubble. While corrections in selected sectors of the market cannot be ruled out, the affordability of home ownership appears to remain healthy. During 2003, Orient Overseas Developments Ltd ( OODL ) delivered a total of approximately 60,000 sq m of completed residential units in Phases 1B and 2A of Century Metropolis in the Xu Hui district of Shanghai. At present, approximately 58,000 sq m of residential units in Phase 2B are under construction. The sales of residential units in Century Metropolis during 2003 were in line with projections and satisfactory. Sales of the residential units in Phase 2B are scheduled for mid The project on the Changle Lu site in the Luwan district of Shanghai will have a total gross floor area of approximately 134,000 sq m and will feature a high-end residential complex in one of Shanghai s most prestigious locations. The Master plan has been approved in principle and piling is scheduled to commence during the summer of Sales of the residential units are expected to begin in The Group s property development team under OODL was able to work through challenges to both construction and sales brought about by SARS. The result of the development projects reflects a deep, mature and well functioning development team adapting well to an ever changing local environment. In addition, OODL has begun targeting areas slightly outside the Shanghai City boundaries. Although still in their early stages, negotiations under way would, if successful, result in a pipeline project of at least 200,000 sq m Gross Floor Area situated 40 minutes to the west of Shanghai. We would expect such a project to begin contributing to the Group from 2006 onwards. 19

22

23

24 Financial Review Analysis of Consolidated Profit and Loss Account Summary of Group Results US$ Variance Operating results by activity: International transportation and logistics 323,123 69, ,642 Container terminals 35,034 11,856 23,178 Property investment and development 21,075 19,631 1,444 Investments and corporate services 238 (5,921) 6,159 Earnings before interest and tax 379,470 95, ,423 Interest income 14,020 11,079 2,941 Interest expenses (30,892) (36,932) 6,040 Financing charges (9,292) (6,292) (3,000) Profit before taxation 353,306 62, ,404 Taxation (24,145) (10,954) (13,191) Minority interests (117) (210) 93 Profit attributable to shareholders 329,044 51, ,306 22

25 International Transportation and Logistics Summary of Operating Results US$ Variance Liftings (TEUs) 2,687,545 2,264, ,663 Revenue per TEU (US$) 1, Turnover Asia 2,042,717 1,439, ,733 North America 481, ,455 63,830 Europe 399, ,557 82,511 Australia 46,484 44,124 2,360 2,969,554 2,218, ,434 Cargo costs (1,253,669) (1,013,763) (239,906) Vessel and voyage costs (630,005) (476,820) (153,185) Equipment and repositioning costs (446,877) (368,111) (78,766) Gross profit 639, , ,577 Business and administrative expenses (324,144) (283,537) (40,607) Other operating income, net 10,449 2,510 7, ,308 78, ,909 Share of results of jointly controlled entities (2,185) (8,918) 6,733 Earnings before interest and tax 323,123 69, ,642 The operating results for international transportation and logistics include the operations of Long Beach Container Terminal in California USA and Kaohsiung Terminal in Taiwan which form an integral part of that business. The international transportation and logistics business trades under the OOCL name and continues to be the principal revenue contributor to the Group and accounted for over 90% of the Group s revenue in International transportation and logistics will continue to be the core business of the Group in which the majority of operating assets will be deployed. 23

26 Financial Review Asia Asia is the largest revenue generating area for the international transportation and logistics business. Turnover categorised under this area is composed of the following: Eastbound freight of the Asia/North America West Coast service; Eastbound freight of the Asia/US East Coast service; Westbound freight of the Asia/Northern Europe service; Westbound freight of the Asia/Mediterranean service; Southbound freight of the Asia/Australia and New Zealand service; various Intra-Asia services; and the operation of Kaohsiung Terminal in Taiwan. Turnover from the Asia area rose from US$1,440.0 million in 2002 to US$2,042.7 million in 2003 with a notable increase in the volume of exports to North America across the Pacific, from which a significant portion of the revenue was derived. The Westbound leg of the Asia/ Northern Europe service also recovered strongly from the poor market conditions prevailing in previous years with a 24% increase in liftings and a corresponding recovery in revenues. Together with the continuing volume increases in Intra-Asia services, all contributed to the revenue growth for the year. Liftings on the Eastbound Asia/North America West Coast service increased by 14%, achieved without softening freight rates. Performance of the Westbound leg of the Asia/Northern Europe service followed a similar pattern with substantial gains in both liftings and revenue. Intra-Asia also recorded a 33% growth in liftings for the year, at the expense of a slight fall in average freight rates. Overall load factors as a percentage of the capacity available during 2003 dropped slightly by 1% as compared with 2002, but compared with a 27% increase in available capacity during the year, notably in the Intra-Asia and Europe bound routes. Results from this region will always be dependent upon the economic environment and consumption patterns of North America and Europe. Kaohsiung Container Terminal in Taiwan forms an integral part of the international transportation and logistics business and its terminal facilities were mainly employed by OOCL and its alliance members. North America Turnover categorised under the North America area is comprised primarily of the following: Westbound freight of the Asia/North America West Coast service; Westbound freight of the Asia/US East Coast service; Eastbound freight of the US East Coast/Northern Europe service; Eastbound freight of the Canada/Northern Europe service; and the operation of Long Beach Container Terminal in California, USA. Revenue increased by US$63.8 million for this area in With the exception of the Eastbound leg of the Canada/Northern Europe service, all routes from this region recorded positive revenue growth, especially the Westbound segment of the Asia/North America West Coast services which experienced a turnaround from the prolonged decline in freight rates since

27 Westbound liftings on the Asia/North America West Coast service recorded a 6% increase over last year while the Westbound trade of the Asia/US East Coast service via the Panama Canal also achieved a notable improvement of 18%. Performance of the Eastbound Canada/ Northern Europe and US East Coast/Northern Europe services barely attained 2002 level. The former achieved improvements in freight rates but at the expense of liftings while the latter s volume gain was largely offset by a corresponding rate decrease. Average revenue per TEU on all outbound cargoes from North America rose by 9% in 2003 compared with 2002, with a notable recovery in the Trans-Pacific routes. With the growth in capacity outpacing the increase in liftings, overall load factors in the region recorded a 6% drop from last year. Long Beach Container Terminal forms an integral part of the international transportation and logistics business with its terminal facilities mainly employed by OOCL and its alliance partners. The operating results of the terminal were comparable with those of Europe Turnover categorised under the Europe area is composed primarily of the following: Westbound freight of the US East Coast/Northern Europe service; Westbound freight of the Canada/Northern Europe service; Eastbound freight of the Asia/Northern Europe service; Eastbound freight of the Asia/Mediterranean service; and various Intra-European services. Turnover for this area in 2003 greatly surpassed that of 2002 by US$82.5 million. The Eastbound leg of the Asia/Northern Europe service, being the largest volume source for the Europe area, performed exceptionally well during the year with a promising growth in volume and a comparable rebound in freight rates. The Westbound rates of the Transatlantic routes also received substantial increments to complement a notable revenue increase for the region. Although liftings for the Westbound sectors of the Canada/Northern Europe and US East Coast/Northern Europe services were slightly better than those of 2002, average revenue per TEU improved by nearly 20% during the year. Comparatively, the Eastbound leg of the Asia/Northern Europe service experienced a rebound from the precarious market conditions of previous years. Liftings for this segment recorded a 21% rise in 2003 and per TEU revenue also registered a 17% gain. Overall load factors as a percentage of capacity available for cargo shipments from this region were 4% lower than that of 2002 but balanced against a 12% capacity increase for the Europe area in year Average revenues per TEU on all outbound cargoes from Europe recorded a 20% increase from the 2002 levels with both the Transatlantic trade lanes and the export market to Asia experiencing a similar recovery in freight rates. 25

28 Financial Review Australia Turnover from this area is principally the Northbound freight of our Asia/Australia and New Zealand services. The East Asia/Australia service was operated in consortium with ANL, ZIM and China Shipping from May 2002 onwards. ZIM withdrew in May 2003 and was replaced by a new service jointly operated with China Shipping. The South East Asia/Australia service is operated in alliance with MISC, MOL and PIL. The New Zealand service is operated under a slot purchase agreement with PIL and RCL. Liftings on the Northbound Asia/Australia and New Zealand service increased by 22% in 2003, at the expense of a 12% drop in average revenue, resulting in a net gain in turnover of US$2.4 million for the year. Operating Costs Cargo costs mainly consist of terminal charges, inland transportation costs, commission and brokerage, cargo assessment and freight tax which were largely paid in the local currencies of the areas in which the activities were performed. With a 19% growth in liftings for 2003, total cargo costs also rose by US$239.9 million, a 24% increase. On a per TEU basis, savings were recorded in items such as transportation, commission and brokerage while terminal costs only grew at a marginal rate. Vessel costs include the operating costs and depreciation charges for the OOCL fleet as well as the net charter hire and slot hire expenses incurred in order to maintain the desired service level. With the total number of vessels, either owned or chartered in and operated by OOCL, increasing from 47 in 2002 to 55 in 2003, total carrying capacity increased from the 153,543 TEU of 2002 to 184,781 TEU in 2003 through the phase-in of new and larger vessels. Consequently, vessel costs increased by 22% in 2003 with a notable rise in charter-hire expenses as charter-hire rates inflated significantly during the year. Voyage costs comprise mainly bunker costs, port charges, canal dues, cargo claims and insurance. The number of sailings in 2003 increased by 8% and bunker prices also rose from an average of US$143 per ton in 2002 to an average of US$167 per ton during As a result, costs in this category were driven up by more than 40%. Equipment costs principally represent maintenance and repair costs, rental payments, depot expenses and depreciation charges for the fleet of containers and chassis equipment while repositioning costs mainly arise from relocating empty containers from areas of low activity to high demand regions. Total equipment and repositioning costs increased by US$78.8 million in 2003, which was in line with the growing size of the container fleet from the 369,699 TEU of 2002 to 420,004 TEU in Business and administrative expenses largely comprise staff costs, office expenses, selling and marketing costs and professional and information system expenses. With the increasing business volumes, additional offices setup around the globe and a 7% headcount increase, business and administrative expenses also rose by US$40.6 million in Share of Results of Jointly Controlled Entities The share of the US$2.2 million loss from jointly controlled entities in 2003 was attributable to the provision for asset impairment for a depot joint venture in Qingdao. The US$8.9 million share of the loss in 2002 arose mainly from a jointly controlled entity which was formed by members of the former Global Alliance to engage in vessel chartering. Following the reorganisation of that alliance at the end of 1997, vessel chartering activities in this joint venture company were much reduced and resulted in operating losses in subsequent years. The chartering arrangements ceased in Earnings Before Interest and Tax Earnings before interest and tax of US$323.1 million for the international transportation and logistics business in 2003 were US$253.6 million higher than last year due mainly to the freight rate and volume increases. Average revenue per TEU for 2003 was US$1,025 as compared with US$891 for Liftings also increased from 2.26 million TEU in 2002 to 2.69 million TEU in 2003.

29 Container Terminals Summary of Operating Results US$ Variance Throughput (units) 1,126,206 1,051,051 75,155 Turnover 251, ,748 35,277 Terminal operating costs (180,727) (171,542) (9,185) Gross profit 70,298 44,206 26,092 Business and administrative expenses (35,264) (32,350) (2,914) Earnings before interest and tax 35,034 11,856 23,178 Container terminal activities include the Group s multi-user terminal operations namely: TSI Terminal Systems Inc. ( TSI ) a wholly owned terminal and management company which operates the Vanterm Terminal in Vancouver, Canada and the Deltaport Terminal at Roberts Bank near Vancouver. OOCL and other Grand Alliance members are principal customers of the terminals. After a slight profit set back in 2001, TSI s profitability returned to a commendable level in 2002 and 2003 consolidated that strength. Howland Hook Container Terminal, Inc. ( HHCTI ) operates a three berth terminal facility on Staten Island, New York, USA. The Group owned an 80% interest in this company when business operations commenced in The remaining 20% equity of the company was subsequently acquired from the minority shareholder in 2001 and it thus became a wholly owned subsidiary of the Group. Grand Alliance services began calling at the terminal in late 1999 and have since became a major user. In 2003, HHCTI successfully negotiated a new terminal lease agreement with the Port Authority with retrospective effect from January 2000, resulting in a one-off credit of US$14.3 million for rental charged in previous years. Global Terminal and Container Services, Inc. ( Global ) operates a two berth terminal facility in New Jersey, USA. These facilities are used by a number of third party carriers. In 2001, one of Global s two major customers was declared bankrupt and withdrew from business. Another major customer, in the light of service rationalization, also ceased calling at the terminal in early 2002, resulting in Global incurring a significant loss for the year. In 2003, management of Global terminal successfully reestablished its customer base and as a result, the bottom line was much improved for the year. 27

30 Financial Review Turnover Turnover increased by US$35.3 million in 2003 as a result of the significant rebound in the business volumes of Global. Total throughput levels surpassed last year and successively set another record high in Average handling rate also showed an 11% growth over that of Terminal Operating Costs Including the one-off credit of rental charged in previous years for HHCTI, operating costs were US$9.2 million higher than 2002 level with an increased number of boxes handled in In addition, as TSI s operating costs were denominated in local currency, i.e. Canadian dollar, its strength against the weakening in US dollar during the year translated into much higher operating costs for the two terminals in Vancouver, in terms of US dollars, when compared with Business and Administrative Expenses Business and administrative expenses recorded a US$2.9 million rise in 2003 as compared with those of In line with the growth in business volumes, additional headcount and office expenses were incurred to handle the activity growth. In addition, the more than 20% appreciation of the Canadian dollar against the US dollar in 2003 inflated costs incurred by TSI which, in real terms, had been well contained. Earnings Before Interest and Tax Overall operating results improved in 2003 as Global returned to profit after suffering a substantial loss in While TSI continued to produce stable profits in 2003, performance for the year was enhanced by the one-off credit of rental accrued in previous years upon the conclusion of the new terminal lease agreement with the Port Authority by HHCTI. Property Investment and Development Summary of Operating Results US$ Variance Rental income 20,046 18,510 1,536 Property management costs (8,924) (8,556) (368) Gross profit 11,122 9,954 1,168 Business and administrative expenses (3,936) (3,027) (909) Profit from property investment 7,186 6, Profit from property developments 13,889 12,704 1,185 Earnings before interest and tax 21,075 19,631 1,444 28

31 The Group owns an approximately 600,000 sq ft office and commercial property, Wall Street Plaza, located at 88 Pine Street, New York, USA, an area popularly referred to as the Wall Street area. The building was constructed in 1972 and is operated as a multi-tenanted building. Approximately 20,000 sq ft is occupied by Group companies. The Group also owns an 8% interest in a modern comprehensive office, commercial, hotel and residential apartment complex known as Beijing Oriental Plaza, with a gross floor area of approximately 570,000 sq m, on a site located at Wangfujing Dajie, Beijing. In addition, the Group owns interests in a number of jointly controlled entities to participate in property development projects in China. The primary location of these projects is Shanghai. The net rental from Wall Street Plaza provided a stable income source. The other principal profit contributor for the year was the development project in Ziyang Lu ( Century Metropolis ) Phase 2A, Shanghai. In year 2002, the major profit contributor was Phase 1B of Century Metropolis. Rental Income Rental income for the year, representing mainly the rental income derived from Wall Street Plaza, was higher than that of last year as most of the leases vacated in 2002 were taken up in 2003, leaving a vacancy rate of less than 1% at the year end. Profit From Property Developments A profit of US$13.9 million was recorded from property developments in 2003 compared with US$12.7 million in A majority of the current year profit arose from Phase 2A of the Century Metropolis project in Shanghai and the principal profit contributor in 2002 was from Phase 1B of the same project. Investments and Corporate Services US$ Variance Portfolio investment income 7,424 1,511 5,913 Provision write-back for diminution in value of long-term investments 507 (507) Others (7,186) (7,939) 753 Earnings/(loss) before interest and tax 238 (5,921) 6,159 Investments in equities and, on a longer term basis, in bonds were managed largely by in-house managers under guidelines imposed by the Investment Committee of the Board. No investment in financial derivatives, where the Group is exposed to financial obligation larger than the amount invested, is allowed. 29

32 Financial Review Portfolio investments recorded a profit of US$7.4 million for 2003, an increase of US$5.9 million as compared with The portfolio investment result reflected the general recovery of the global financial markets during Others include corporate business and administration overheads, exchange differences, the research costs of financial projects and other miscellaneous income and expenses. With favourable exchange differences recorded for the year, the net expenses level of 2003 was US$0.8 million lower than that of Interest Income, Expenses and Financing Charges The Group invests surplus liquid funds, other than funds allocated for investments in bonds and listed equity securities, in cash and bank deposits. The Group incurs interest expenses on bank loans, finance leases and, to a very small extent, on bank overdrafts. These borrowings are variously secured against vessels, containers, chassis, terminal equipment and the investment property owned by the Group. The Group also incurs financing charges on its asset securitisation programme and fees as a result of finance arrangements and lease administration. Interest Income Interest income arises from the deposit of available Group cash balances on a short-term basis with banks and other financial institutions. Interest income may vary year to year with the cash flows of the business, the level of capital expenditure and new investments (particularly in relation to property development projects in China) and the amount which the Group commits to its investment portfolio. With the growth in average cash balances during the year, total interest income for 2003 was US$2.9 million higher than Interest Expenses Interest expenses decreased by US$6.0 million in 2003 as compared with With a further decline in general interest rates during 2003, interest expenses reduced correspondingly, but partly offset by the increase in indebtedness as a result of the new loans drawn upon the delivery of newbuildings during the year. The average cost of finance dropped from 3.8% in 2002 to 3.1% in 2003 as a whole. Financing Charges Financing charges mainly include loan arrangement fees, commitment fees, financing costs for loan stocks and charges for the asset securitisation programme. Total financing charges for the year increased by US$3.0 million principally due to the full year effect of the financing costs associated with the loan stocks of a subsidiary, offset in part by savings in the asset securitisation programme pursuant to the lower prevailing interest rates. 30

33 Profit before Taxation Pre-tax profit for the year reached a record high of US$353.3 million compared with US$62.9 million in The international transportation and logistics business achieved a remarkable result for the year. The Group s result was further boosted by the timely recovery of terminal operations and continual contributions from the property investment and development segment. Taxation US$ Variance Overseas taxation Company and subsidiaries: North America 15,900 6,450 (9,450) Europe (263) China 1, (634) Asia and others (524) Jointly controlled entities: Europe China 6,047 3,714 (2,333) Total 24,145 10,954 (13,191) The Group s tax liabilities largely arise from profits on its terminal operations in North America. Tax was also incurred for agency and logistics activities carried on in other parts of the world. The higher tax liabilities in North America for the year principally reflected the much improved profit level from terminal operations while the increase in tax in China was attributable to the increase of business operation in the growing logistics market. 31

34 Financial Review Review of Consolidated Balance Sheet Summary of Consolidated Balance Sheet US$ Variance Property, plant and equipment 1,579,798 1,342, ,360 Jointly controlled entities 24,298 35,576 (11,278) Long-term investments 99, ,763 (1,545) Intangible assets 29,817 27,541 2,276 Cash and portfolio investments 680, , ,360 Accounts receivable and properties under development and for sale 324, ,913 65,955 Deferred assets 16,105 11,663 4,442 GROSS ASSETS 2,754,910 2,189, ,570 Accounts payable and accruals (486,244) (383,550) (102,694) Current taxation (3,159) (3,870) 711 GROSS ASSETS LESS TRADING LIABILITIES 2,265,507 1,801, ,587 Long-term liabilities 840, , ,918 Bank loan, overdrafts and current portion of long-term liabilities 257, ,849 44,636 Total debt 1,098, , ,554 Minority interests and deferred liabilities 56,591 45,869 10,722 Ordinary shareholders funds 1,110, , ,311 CAPITAL EMPLOYED 2,265,507 1,801, ,587 Debt to equity ratio Net debt to equity ratio Accounts payable as a % of turnover Accounts receivable as a % of turnover % return on average ordinary shareholders funds Net asset value per ordinary share (US$) Cash and portfolio investments per ordinary share (US$) Share price at 31st December (US$) Price earnings ratio based on share price at 31st December

35 Property, Plant and Equipment US$ Variance International transportation and logistics 1,312,877 1,114, ,471 Container terminals 166, ,939 28,836 Property investment and development 100,146 90,093 10,053 1,579,798 1,342, ,360 International transportation and logistics remain the core business of the Group and the one in which the majority of property, plant and equipment are deployed. The assets largely comprise container vessels, containers and chassis, property, terminal and computer equipment and systems. In 2003, the Group placed orders for another four new container vessels of 8,063 TEU capacity. Together with the 8 vessels of the same size ordered in 2000 to 2002, there are 12 SX class vessels on order. Two were delivered in 2003, four will be delivered in 2004 and two each in 2005, 2006 and The increase in property, plant and equipment in 2003 principally reflected the delivery of two new SX class container vessels previously ordered, offset in part by the annual depreciation charges for the year. The increase in property, plant and equipment in container terminals in 2003 includes the additional terminal equipment acquired by terminals during the year and favourable exchange differences arising from the appreciation of the Canadian dollar. Property, plant and equipment in property investment and development activities mainly represent the commercial building, Wall Street Plaza, in New York. During 2003, the Group further acquired 36.5% of the land parcel on which the building resides at a cost of US$10.0 million. The building, including the land parcel acquired during the year, was valued at US$100.0 million at the end of 2003 by an independent valuer (2002 : US$90.0 million). Jointly Controlled Entities US$ Variance International transportation and logistics 2,777 4,185 (1,408) Property investment and development 21,521 31,391 (9,870) 24,298 35,576 (11,278) The investment in jointly controlled entities by international transportation and logistics for 2003 mainly represents an interest in a joint venture for the operation of a container depot and transportation business in Qingdao. During the year, provision has been made against certain assets of this joint venture company, resulting in the drop in the investment balance at year end. 33

36 Financial Review For property development activities, investments in jointly controlled entities mainly consist of: a 47.5% interest in a domestic housing project located at Zhenning Lu, Shanghai (the Courtyards ). The development consists of four residential towers with a total gross floor area of approximately 65,000 sq m. The project was completed in 2001 and all units were sold and handed over to their buyers during the year. Dividend distribution and capital repatriation in respect of the project were largely completed in a 47.5% interest in a domestic housing project located at Ziyang Lu, Shanghai ( Century Metropolis ) with a total gross floor area of approximately 240,000 sq m. This project is being developed in phases. Phase 1A was completed and handed over to buyers at the end of Handover of Phase 1B began in 2002 and Phase 2A was topped out in December of that year. The project was the major profit contributor in 2002 and The decrease in the investments in jointly controlled entities for property development activities is mainly a reflection of the dividends and progressive capital repatriations from the property development projects. Long-term Investments US$ Variance International transportation and logistics 1,149 1, Property investment and development 93,601 93,888 (287) Others 4,468 5,803 (1,335) 99, ,763 (1,545) Long-term investments of the Group at 31st December 2003 amounted to US$99.2 million, principally represented by the Group s 8% interest in Beijing Oriental Plaza of US$93.6 million. Intangible Assets US$ Variance International transportation and logistics 21,244 21,576 (332) Container terminals (42) Property investment and development 7,860 5,210 2,650 29,817 27,541 2,276 Intangible assets principally represent computer software development costs, deferred property leasing expenses and financing charges. Other than property leasing expenses, which will be written-off over the leasing period, intangible assets are to be amortised over five years. 34

37 Cash and Portfolio Investments US$ Variance International transportation and logistics 169, ,876 (734) Container terminals 8,038 11,738 (3,700) Property investment and development 40,010 10,054 29,956 Portfolio investment funds 463, , , , , ,360 The Group adopts a central treasury system under which funds surplus to planned requirements are set aside for portfolio investments in fixed income bonds or equities managed by in-house managers under guidelines imposed by the Investment Committee of the Board. Cash and portfolio investments per ordinary share at 31st December 2003 amounted to US$1.45 compared with US$0.80 at 31st December The Group s investment portfolios are largely invested in short to medium-term US dollar bonds and similar instruments and short-term cash deposits. No investments are made in derivative investment products. Accounts Receivable and Properties under Development and for Sale US$ Variance International transportation and logistics 187, ,098 42,533 Container terminals 46,091 37,476 8,615 Property investment and development 91,001 76,269 14,732 Others , ,913 65,955 Accounts receivable and properties under development and held for sale increased by US$66.0 million to US$324.9 million at the end of 2003, principally a reflection of an increase in trade receivables pursuant to the growth in business volumes of the international transportation, logistics and container terminal operations, plus further investments in the property development project in Luwan, Shanghai. 35

38 Financial Review Accounts Payable and Accruals US$ Variance International transportation and logistics 456, , ,637 Container terminals 23,862 38,898 (15,036) Property investment and development 4,300 1,941 2,359 Others 1,732 1,998 (266) 486, , ,694 Accounts payable at the end of 2003 were US$102.7 million higher than those at the end of The increase in accounts payable was largely in line with the growth in business volumes of the international transportation and accounts payable, as a percentage of turnover at 15.0%, was slightly lower than that of 15.6% for The decrease in accounts payable and accrual balances for container terminals in 2003 mainly reflected the one-off credit received for rental accrued over previous years. Total Debt US$ Variance Bank loans 645, ,788 54,951 Other secured loans 18,121 21,606 (3,485) Finance lease obligations 395, , ,144 Bank overdrafts and short-term loans 38,958 44,014 (5,056) 1,098, , ,554 Total debt increased during the year by US$202.6 million principally as a result of the financial obligation taken up pursuant to the delivery of new container vessels during the year, offset in part by scheduled repayment of loans and bank indebtedness. The repayment profile of the Group s long-term liabilities is set out in Note 24 to the Accounts. 36

39 Debt Profile As at the end of 2003, over 96% (2002 : 92%) of the Group s total debts were denominated in US dollars which effectively reduces the risk of exchange fluctuations. Loans in currencies other than US dollars are hedged with a comparable amount of assets in local currencies. Of the total US$1,098.2 million debt outstanding at the end of 2003, US$149.5 million was fixed rate debt comprised mainly of container and terminal equipment leases. The fixed rates range from 3.5% to 10.6% dependent upon the cost of money at the time each transaction was entered into. The remaining US$948.7 million of indebtedness was subject to floating interest rates at various competitive spreads over three months LIBOR (or equivalent) and relates principally to indebtedness on vessels and the investment property, Wall Street Plaza. In order to reduce the impact on the Group s profitability of fluctuating interest rates, the Group entered into interest rate collar contracts for US$100 million of its floating rate debt. The Group s average cost of debt at 31st December 2003 was 3.1%, inclusive of the interest rate hedging contracts. Shareholders Funds In September 2003, the Group completed an off-market share repurchase of 46,957,088 ordinary shares at a price of HK$9.8 per share. The repurchased shares were subsequently cancelled resulting in the number of issued and outstanding shares of the Company being reduced from 517,141,632 shares to 470,184,544 shares. Shareholders funds also dropped by US$59.7 million as a result. However, with the favourable profit reported for the year, the Group s shareholders funds increased by US$250.3 million to US$1,110.8 million at the end of 2003 with a net asset value per ordinary share of US$2.36 (2002 : US$1.66). Net Debt to Equity Ratio This ratio was lower at 0.4 as at the end of 2003, as against 0.6 for 2002, with the profits recorded for 2003, offset in part by the share repurchase during the year. This ratio has been closely monitored in the light of the delivery and financing of new vessels ordered and forecasts for the business over the next four years. It is the Group s objective to keep this key ratio below the 1.0 threshold. Operating Leases and Commitments In addition to the operating assets owned by the Company and its subsidiaries, the Group also manages and utilises assets through operating lease arrangements. The total rental payment in respect of these leases for 2004 amounted to US$260.9 million as detailed in Note 31(b) to the Accounts of this report. Assets under operating lease arrangements consist primarily of container boxes, chassis, container vessels and certain terminals in North America. As at the end of 2003, the Group had outstanding capital commitments amounting to US$868.4 million, principally represented by the orders placed for ten new container vessels to be delivered between 2004 and

40 Financial Review Analysis of Consolidated Cash Flow Statement Summary of Consolidated Cash Flow US$ Variance Net cash inflow from operations 520, , ,850 Investing and financing inflow: Interest and investment income 19,149 9,455 9,694 Sale of property, plant and equipment and investments 92,757 2,566 90,191 New loan drawdown 189,706 94,763 94,943 Cash from jointly controlled entities 17,893 10,575 7,318 Capital contribution from minority interests 3,600 (3,600) Others 527 (527) 319, , ,019 Investing and financing outflow: Interest paid (41,827) (43,202) 1,375 Dividends paid to shareholders (31,028) (7,757) (23,271) Taxation paid (12,355) (5,966) (6,389) Purchase of property, plant and equipment and investments (236,421) (70,203) (166,218) Loan repayments (184,403) (149,609) (34,794) Purchase of intangible assets (10,547) (7,088) (3,459) Share repurchase (59,739) (59,739) Others (255) (470) 215 (576,575) (284,295) (292,280) Net cash inflow 263,626 7, ,589 Beginning cash and portfolio balances 412, ,424 10,022 Changes in exchange rates 4,734 2,985 1,749 Ending cash and portfolio balances 680, , ,360 Represented by: Unrestricted bank balances and deposits 536, , ,933 Restricted bank balances and deposits 35,850 53,312 (17,462) Portfolio investments 108,165 54,276 53, , , ,360 38

41 A net cash inflow of US$263.6 million was recorded for 2003 as compared with an inflow of US$7.0 million for Operating cash inflow for the year was substantially higher than that of 2002 pursuant to the level of operating profits recorded for the year. In 2003, the new vessels previously ordered were delivered, which accounted for the rise in capital payments and corresponding loan drawdown amounts while the sale of property, plant and equipment for the year largely represented the disposal of a container vessel pursuant to deployment plans and the sale-and-lease-back arrangement for one of the delivered vessels. The US$59.7 million share repurchase payment in 2003 reflected the off-market buy back of 46,957,088 ordinary shares of the Company in September Total cash and portfolio balances rose to US$680.8 million as at the end of 2003 compared with US$412.4 million in Liquidity As at 31st December 2003, the Group had total cash and portfolio investment balances of US$680.8 million compared with debt obligations of US$218.5 million repayable in Total current assets at the end of 2003 amounted to US$984.9 million against total current liabilities of US$746.9 million. The Group s shareholders funds are entirely ordinary shareholders equity and no loan capital is in issue. The Group prepares and updates cashflow forecasts for asset acquisitions, project development requirements, as well as working capital needs, from time to time with the objective of maintaining a proper balance between a conservative liquidity level and the efficient investment of surplus funds. 39

42 Board of Directors C C TUNG TSANN-RONG CHANG Mr Tung, aged 61, has been appointed Chairman, President and Chief Executive Officer of OOIL in October Mr Tung chairs the Executive Committee and serves on the Investment Committee of the Board of OOIL. He is also Chairman or a Director of various subsidiary companies of OOIL. Mr Tung graduated from the University of Liverpool, England, where he received his Bachelor of Science degree and acquired a Master s degree in Mechanical Engineering at the Massachusetts Institute of Technology in the United States. Mr Tung is an Independent Non-executive Director of Zhejiang Expressway Co Ltd; PetroChina Co Ltd; Chekiang First Bank Ltd; Wing Hang Bank, Ltd; Bank of China (Hong Kong) Ltd; BOC Hong Kong (Holdings) Limited; Global China Group Holdings Limited and Cathay Pacific Airways Limited. Mr Tung was Chairman of the Hong Kong Shipowner s Association between , a Chairman of the Hong Kong General Chamber of Commerce between He is also Chairman of the Hong Kong-America Center; Chairman of the Institute for Shipboard Education Foundation; Chairman of the Court and a member of the Council of The Hong Kong Polytechnic University; a member of the Hong Kong Port Development Council; Board of Trustees of the University of Pittsburg and a member of the Board of Visitors of the School of Foreign Service, Georgetown University. Mr Chang, aged 64, has been a Director of OOIL since 1988 and Vice Chairman since 1st December He is also a member of the OOIL Executive Committee. Mr Chang is a Certified Public Accountant in Taiwan and holds a Master of Business Administration degree from Indiana State University, USA. Mr Chang has served the Group in various capacities for 35 years and was the Chief Executive Officer of Orient Overseas Container Line Limited and a Director of various OOIL subsidiaries until 31st December

43 ROGER KING Mr King, aged 63, was Managing Director and Chief Operating Officer of Orient Overseas (Holdings) Limited ( OOHL ) for the period September 1985 to January 1987 and a Director from 1983 until He has been a Director of OOIL since 1992 and is also a Director of an associated company. He became a Non-executive Director of OOIL in August Mr King is a graduate of the University of Michigan, New York University and Harvard Business School. Prior to joining OOHL in 1974 he served in the United States Navy and worked in computer research and management consultancy at Bell Telephone Laboratorie. Mr King is a Director of a number of other companies, including Arrow Electronics Corporation, a company listed on the New York Stock Exchange and a Non-executive Director of World Metal Holdings Limited, a listed company in Hong Kong. He is also the former Executive Chairman of Systempro Computers Limited, one of the largest personal computer retailers in Hong Kong and the former President and CEO of Sa Sa International Holdings Limited, a company listed on The Stock Exchange of Hong Kong Ltd. Mr King also serves on a number of advisory committees, including the Hong Kong Management Association, the Hong Kong University of Science and Technology and the Zhejiang Province People s Political Consultative Conference. Mr King is the brother-in-law of Mr C C Tung. ROBERT H SUAN Mr Suan, aged 64, has been a Director of OOIL since May He is a member of OOIL Finance Committee, Share Committee and Bridge Financing Committee. Mr Suan is the Managing Director of Orient Overseas Developments Ltd, a wholly-owned subsidiary of OOIL, which is the holding company for the Group s China investments and the investment property Wall Street Plaza in New York City. Mr Suan has been with the Group for 34 years, has held various positions involving US investments and real estate. He holds a Ph.D. in civil engineering from the University of London. Mr Suan is married to a cousin of Mr C C Tung. NICHOLAS D SIMS Mr Sims, aged 50, has been a Director and the Chief Financial Officer of OOIL since October He serves on the OOIL Executive Committee, the Finance Committee, the Investment Committee, the Audit Committee, the Share Committee and the Bridge Financing Committee of the Board of OOIL and is a Director of various subsidiary companies of OOIL. Mr Sims was previously Managing Director of Wayfoong Shipping Services, a member of HSBC Group responsible for ship finance business throughout the Asia Pacific region. Mr Sims joined HSBC in 1973 and served the international banking group in Hong Kong and London. 41

44 Board of Directors SIMON MURRAY 42 PHILIP CHOW Mr Chow, aged 56, has been a Director of OOIL since December He is a member of the Executive Committee, the Finance Committee, the Share Committee and the Bridge Financing Committee and a Director of various subsidiary companies of OOIL. Mr Chow holds a Bachelor of Science degree in chemistry and physics from the University of Hong Kong and a Master of Business Administration degree from the Chinese University of Hong Kong. He has served the Group in various capacities for 27 years and is the Chief Executive Officer of OOCLL. Mr Murray, CBE, aged 63, has been a Nonexecutive Director of OOIL since 1992 and was from 1989 until 1992 a Non-executive Director of OOHL. He serves on the Investment Committee and the Audit Committee of OOIL. He is currently the Chairman of General Enterprise Management Services Limited, a private equity fund management company sponsored by Simon Murray And Associates. He is also a Director of a number of public companies, including Hutchison Whampoa Limited and Cheung Kong Holdings Limited. Mr Murray is a member of the Former Directors Committee of the Community Chest of Hong Kong and has been involved in a number of other charitable organisations, including Save The Children Fund and The China Coast Community Association. DR VICTOR K FUNG Dr Fung, aged 58, has been a Non-executive Director of OOIL since July He is Chairman of the Audit Committee of OOIL. Dr Fung is Chairman of the Li & Fung Group, the Hong Kong Airport Authority, the Hong Kong University Council and the Greater Pearl River Delta Business Council. He was appointed by Government to serve as the Hong Kong Representative on the APEC Business Advisory Council from 1996 to From 1991 to 2000, he was Chairman of the Hong Kong Trade Development Council. Dr Fung is also active on a number of Government advisory boards including the Judicial Officers Recommendation Commission. Dr Fung holds a Bachelor of Science and a Master of Science degree in electrical engineering from the Massachusetts Institute of Technology and a Doctorate in Business Economics from Harvard University. In 2003, the Government of the Hong Kong Special Administrative Region awarded Dr Fung the Gold Bauhinia Star for distinguished service to the community.

45 PROF RICHARD WONG Professor Wong, aged 51, has been a Nonexecutive Director of OOIL since December He serves on the Investment Committee and the Audit Committee of OOIL. He graduated from University of Chicago with Bachelor s, Master s and Ph.D. degrees in Economics and is Dean of the Faculty of Business and Economics and Chair of Economics at The University of Hong Kong. He has been active in advancing economic research on policy issues in Hong Kong and China. He was awarded the Silver Bauhinia Star in 1999 by the Government of the Hong Kong Special Administrative Region for his contributions to education, housing, industry and technology development. He was appointed a Justice of the Peace in July

46

47

48 Financial Calendar Announcement of results for the half year ended 30th June th August 2003 Despatch of 2003 Interim Report to shareholders 8th September 2003 Announcement of results for the year ended 31st December th March 2004 Despatch of 2003 Annual Report to shareholders 2nd April 2004 Closure of the Register of Members to determine 20th April 2004 entitlements to a final dividend and Bonus Shares for ordinary shareholders to 27th April 2004 in respect of the year ended 31st December 2003 both days inclusive 2003 Annual General Meeting 27th April 2004 Payment of 2003 final ordinary dividend together with the Bonus Shares 11th May

49 Shareholder Information Ordinary Shares: Issued shares 470,184,544 shares (as at 31st December 2003) 517,184,544 shares (as at 19th March 2004) Nominal value US$0.10 Annual Report This annual report is available in both English and Chinese. Shareholders can obtain copies by writing to: Computershare Hong Kong Investor Services Limited Rooms , 19th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong If you are not a shareholder, please write to: OOCL (Corporate Services) Limited, 33rd Floor, Harbour Centre, 25 Harbour Road, Wanchai, Hong Kong Attn: Company Secretary Our annual report and accounts are also available online at our corporate website at Shareholder Services Any matters relating to your shareholding, such as transfer of shares, change of name or address, and loss of share certificates should be addressed in writing to the Company s Branch Registrar: Computershare Hong Kong Investor Services Limited Rooms , 19th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong Telephone (852) Facsimile: (852) Shareholder Enquiries Our enquiry hotline is operational during normal office hours: Telephone: (852) Facsimile: (852)

50 Shareholder Information Ordinary Shareholder Information at 31st December 2003: Shareholders Shares of US$0.10 each Category Number Percentage Number Percentage Corporate % 454,830, % Untraceable shareholders registered in name of Computershare Hong Kong Investor Services Limited % 345, % Individual 1, % 15,009, % 1, % 470,184, % Shareholders Shares of US$0.10 each Number of Shares Held Number Percentage Number Percentage 1-2, % 354, % 2,001-5, % 224, % 5,001-10, % 261, % 10,001-20, % 369, % 20, , % 1,053, % 100, , % 604, % 200, , % 345, % 500,001-1,000, % 2,699, % 1,000,001-2,000, % 2,202, % 5,000,001-10,000, % 16,832, % 10,000,001 or above % 445,237, % 1, % 470,184, % Ten Largest Ordinary Shareholders At 31st December 2003 the interests of the 10 largest ordinary shareholders of the Company, as recorded in the Company s principal register and Hong Kong branch register of members, were as follows: Number of ordinary Name of ordinary shareholder shares held Percentage Wharncliff Limited 138,215, % Bank of China (Hong Kong) Nominees Limited 130,943, % HKSCC Nominees Limited 95,242, % Springfield Corporation 55,409, % Monterrey Limited 25,425, % Leung Hok Pang 8,803, % HSBC Nominees (Hong Kong) Limited 8,029, % Chin Yiu Tong 1,180, % Mok Kwun Cheung 1,022, % The First National Bank of Boston 612, % 48

51 Corporate Governance Code of Best Practice The Board is supportive of high standards of corporate governance. The Group has complied throughout the financial year with the Code of Best Practice issued by The Stock Exchange of Hong Kong Limited, with the exception that the Independent Non-executive Directors have not been appointed for a specific term and are subject to retirement by rotation and re-election at the Annual General Meeting of the Company in accordance with the provisions of the Company s Bye-laws. The Board, in addition, acknowledges its responsibility for the Group s systems of internal control and has pursued this responsibility through formalised Group financial and legal procedures, the Group s Internal Audit Department and the Audit Committee. The Board The Board currently comprises nine Directors of which three are Independent Non-executive Directors and one is a Non-executive Director. The Board meets at least four times each year and has a formal schedule of matters referred to it for consideration and decision. This includes the approval of strategy recommendations and budgets as well as significant operational and financial management matters. Full minutes of Board meetings are kept by the Company Secretary and are available for inspection, at any time during office hours, on reasonable notice, by any Director. Any Director may, in furtherance of his duties, take independent professional advice where necessary and at the expense of the Company. All Directors have access to the Chief Financial Officer and the Company Secretary, whose appointments and removal are matters for the Board as a whole. The Chief Financial Officer and the Company Secretary are responsible to the Board for ensuring that agreed procedures, rules and regulations, as applicable, are observed. The Audit Committee The Audit Committee is comprised of Dr Victor Fung (Chairman), Mr Simon Murray and Prof Richard Wong, Independent Non-executive Directors, and the Chief Financial Officer with the head of the Internal Audit Department as the secretary and the Company Secretary as the assistant secretary of the Committee. The Committee meets not less than twice a year to review the completeness, accuracy and fairness of the half-year and the annual financial statements before submission to the Board, to consider the nature and scope of internal audit programmes and audit reviews and to review the effectiveness of the financial reporting process and internal control system of the Company. The external auditors, the Group Financial Controller and the General Manager - Finance of OOCLL attend the Committee meetings at the invitation of the Committee. Internal Control The Group has an established internal financial control framework which is documented in the form of Group financial and legal procedures, compliance with which is mandatory. Actual operational results are reported against budget each month. Detailed forecasts for the year and long-term forecasts of profit and loss, cash flow and balance sheet are regularly reviewed and updated. There are also clearly defined procedures for the control of capital and major expenditure commitments and off balance sheet financial instruments, and the supervision, control and review of the investment portfolio. The Group has appointed a Compliance Officer to monitor connected transactions. Going Concern After making due enquiries the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. 49

52 Notice of Annual General Meeting NOTICE is hereby given that the Eighteenth Annual General Meeting of ORIENT OVERSEAS (INTERNATIONAL) LIMITED (the Company ) will be held at the Concord Room, 8th Floor, Renaissance Harbour View Hotel, 1 Harbour Road, Wanchai, Hong Kong on 27th April 2004 at 10:00 a.m. for the following purposes: 1. To consider and adopt the audited Statement of Accounts and the Reports of the Directors and the Auditors for the year ended 31st December 2003; 2. To declare the payment of a final dividend for the year ended 31st December 2003; 3. To consider and, if thought fit, pass, with or without modification, the following resolutions as an Ordinary Resolution: ORDINARY RESOLUTION THAT conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited granting listing of and permission to deal in the new shares of US$0.10 each (individually a Bonus Share and collectively the Bonus Shares ) in the capital of the Company to be issued: (a) to capitalise such amount necessary to give effect to the issue of the Bonus Shares that is for the time being standing to the credit of the share premium account of the Company and the Directors be and are hereby authorised to apply such sum in paying up in full at par (US$0.10) such number of Bonus Shares to be allotted and issued as fully paid to the shareholders of the Company on the basis of one (1) Bonus Share for every ten (10) issued ordinary shares of US$0.10 each held by such shareholders whose names appear on the Register of Members of the Company at the close of business on 27th April 2004 and to allot and issue such Bonus Shares; (b) the Bonus Shares to be issued shall rank pari passu in all respects with the existing issued shares of the Company as at the date of issue of such Bonus Shares; (c) no fractional Bonus Shares (if any) shall be allotted to the shareholders of the Company and fractional entitlements will be rounded down to the nearest whole number and sold for the benefit of the Company; and (d) the Directors be and are hereby authorised to do all acts and things as may be necessary and expedient in connection with the issue of Bonus Shares. ; 4. To re-elect Directors and authorise the Board of Directors to fix their remuneration; 5. To re-appoint PricewaterhouseCoopers as Auditors and to authorise the Board of Directors to fix their remuneration; and 50

53 6. To consider and, if thought fit, pass, with or without modification, the following resolutions as Ordinary Resolutions:- ORDINARY RESOLUTIONS (a) THAT a general mandate be and is hereby generally and unconditionally given to the Directors to exercise during the Relevant Period (as hereinafter defined) all the powers of the Company to allot, issue and otherwise deal with Shares (as hereinafter defined) or additional Shares of the Company and to make, issue or grant offers, agreements, options or warrants which will or might require the exercise of such mandate either during or after the Relevant Period, otherwise than pursuant to a rights issue, bonus issue, issue of scrip dividends or the exercise of rights of subscription or conversion under the terms of any shares, bonds, warrants or other securities carrying a right to subscribe for or purchase shares of the Company issued by the Company or a subsidiary or whose issue is authorised on or prior to the date this resolution is passed, not exceeding twenty per cent. of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing of this resolution. (b) THAT a general mandate be and is hereby generally and unconditionally given to the Directors to exercise during the Relevant Period (as hereinafter defined) all the powers of the Company to purchase shares of all classes in the capital of the Company, securities convertible into shares and options, warrants or similar rights to subscribe for or purchase any shares or such convertible securities, provided however that the aggregate nominal amount of such shares, or (as the case may be) conversion, subscription or purchase rights attaching to the respective security, to be purchased shall not exceed ten per cent. of the aggregate nominal amount of such shares, or (as the case may be) conversion, subscription or purchase rights attaching to that security, in issue as at the date of passing of this resolution. For the purposes of resolutions 6(a) and 6(b): Relevant Period means the period from the passing of this resolution until whichever is the earlier of: (i) the conclusion of the next Annual General Meeting of the Company; (ii) the expiration of the period within which the next Annual General Meeting of the Company is required by Bermudan law or the Bye-laws of the Company to be held; or (iii) the date on which the authority set out in this resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting. Shares means shares of all classes in the capital of the Company and securities convertible into shares and options, warrants or similar rights to subscribe for or purchase any shares or such convertible securities. (c) THAT the general mandate granted to the Directors to allot Shares pursuant to the resolution set out in item 6(a) of the Notice of this meeting be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of the share capital of the Company purchased, or that share capital which would fall to be subscribed or purchased pursuant to the conversion, subscription or purchase rights attaching to any other securities purchased, by the Company pursuant to the authority granted by the resolution set out in item 6(b) of the Notice of this meeting, provided that such amount shall not exceed ten per cent. of the aggregate nominal amount of the shares, or (as the case may be) conversion, subscription or purchase rights attaching to that security, in issue as at the date of passing of this resolution. 51

54 Notice of Annual General Meeting 7. To consider and, if thought fit, pass, with or without modification, the following resolution as a Special Resolution:- SPECIAL RESOLUTION THAT the existing bye-laws of the Company be and are hereby amended in the following manner: (a) by adding the following definition in Bye-law 1 immediately after the definition of Act associate the meaning attributed to it in the rules of the Designated Stock Exchange. ; (b) by deleting the existing Bye-law 2(e) in its entirety and substituting therefor the following: 2(e) expressions referring to writing shall, unless the contrary intention appears, be construed as including printing, lithography, photography and other modes of representing words or figures in a visible form, and including where the representation takes the form of electronic display, provided that both the mode of service of the relevant document or notice and the shareholder s election comply with all applicable Statutes, rules and regulations; ; (c) by adding the following new Bye-law 2(k): 2(k) references to a document being executed include references to it being executed under hand or under seal or by electronic signature or by any other method and references to a notice or document include a Notice or document recorded or stored in any digital, electronic, electrical, magnetic or other retrievable form or medium and information in visible form whether having physical substance or not. ; (d) by deleting the existing Bye-law 51 in its entirety and substituting therefor the following: 51. The registration of transfers of shares or of any class of shares may, after notice has been given by advertisement in an appointed newspaper and, where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange or by any means in such manner as may be accepted by the Designated Stock Exchange to that effect be suspended at such times and for such periods (not exceeding in the whole thirty (30) days in any year) as the Board may determine. ; (e) by deleting the existing Bye-law 66 in its entirety and substituting therefor the following: 66. Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with these Bye-laws, at any general meeting on a show of hands every Member present in person or by proxy or by attorney or (being a corporation) is present by a representative duly authorised under Section 78 of the Act shall have one vote and on a poll every Member present in person or by proxy shall have one vote for every fully paid share of which he is the holder. A resolution put to the vote of a meeting shall be decided on a show of hands unless it is required by the rules of the Designated Stock Exchange that such resolution shall be voted by way of poll or a poll is demanded before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll: (a) by the Chairman; or 52

55 (b) by at least three Members present in person or by proxy for the time being entitled to vote at the meeting; or (c) by a Member or Members present in person or by proxy and representing not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or (d) by a Member or members present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right. A demand by a person as proxy for a Member shall be deemed to be the same as a demand by the Member. (f) by re-numbering existing Bye-law 76 as Bye-law 76(1) and adding the following new Bye-law 76(2) immediately thereafter: (2) Where any Member is, under the rules of the Designated Stock Exchange, required to abstain from voting on any particular resolution or restricted to voting only for or only against any particular resolution, any votes cast by or on behalf of such Member in contravention of such requirement or restriction shall not be counted. ; (g) by deleting the word special in the second line in Bye-law 86(4) and substituting therefore the word ordinary ; (h) by deleting the existing Bye-law 89 in its entirety and substituting therefor the following: 89. No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election, be eligible for election as a Director at any general meeting unless a notice in writing signed by a Member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election and also a notice in writing signed by the person to be proposed of his willingness to be elected shall have been lodged at the Office or the head office provided that the minimum length of the period, during which such notice(s) are given, shall be at least seven (7) days and that the period for lodgment of such notice(s) shall commence no earlier than the day after the dispatch of the notice of the general meeting appointed for such election and end no later than seven (7) days prior to the date of such general meeting. ; (i) by deleting the existing Bye-law 104 in its entirety and substituting therefor the following: 104.(1) A Director shall not vote (nor be counted in the quorum) on any resolution of the Board approving of any contract or arrangement or any other proposal in which he or any of his associates is materially interested, but this prohibition shall not apply to any of the following matters namely: (a) any contract or arrangement for the giving to such Director or his associate(s) any security or indemnity in respect of money lent by him or any of his associates or obligations incurred or undertaken by him or any of his associates at the request of or for the benefit of the Company or any of its subsidiaries; (b) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his associate(s) has himself/themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security; 53

56 Notice of Annual General Meeting (c) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer; (d) any contract or arrangement in which the Director or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company; (e) any contract or arrangement concerning any other company in which the Director or his associate(s) is/are interested only, whether directly or indirectly, as an officer or executive or a shareholder other than a company in which the Director and his associate(s) are beneficially interested in five (5) per cent. or more of the issued shares or of the voting rights of any class of shares of such company (or any third company through which his interest or that of any of his associates is derived); or (f) any proposal concerning the benefit of employees of the Company or its subsidiaries, including the adoption, modification or operation of (i) any employee s share scheme or any share incentive or share option scheme under which the Director or his associate(s) may benefit; or (ii) a pension fund or retirement, death or disability benefits scheme or other arrangement which relates both to Directors, his associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his associate(s), as such any privilege or advantage not accorded to the employees to which such scheme or fund relates. (2) A company shall be deemed to be a company in which a Director and/or his associate(s) owns five (5) per cent. or more if and so long as (but only if and so long as) he and/or his associates, (either directly or indirectly) are the holders of or beneficially interested in five (5) per cent. or more of any class of the equity share capital of such company or of the voting rights available to members of such company (or of any third company through which his/their interest or that of any of his associates is derived). For the purpose of this paragraph there shall be disregarded any shares held by a Director or his associate(s) as bare or custodian trustee and in which he or any of them has no beneficial interest, any shares comprised in a trust in which the interest of the Director or his associate(s) is/are in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares comprised in an authorised unit trust scheme in which the Director or his associate(s) is/are interested only as a unit holder. (3) Where a company in which a Director and/or his associate(s) holds five (5) per cent. or more is/are materially interested in a transaction, then that Director and/or his associate(s) shall also be deemed materially interested in such transaction. (4) If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or his associate(s) or as to the entitlement of any Director (other than such chairman) to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director and/or his associate(s) concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board. ; 54

57 (j) By deleting the existing Bye-law 160 in its entirety and substituting therefor the following: 160. Any notice or document (including any corporate communication within the meaning ascribed thereto under the rules of the Designated Stock Exchange), whether or not to be given or issued under these Bye-laws, from the Company to a Member shall be in writing or by cable, telex or facsimile transmission message or other form of electronic transmission or communication and any such notice and document may be served or delivered by the Company on or to any Member either personally or by sending it through the post in a prepaid envelope addressed to such Member at his registered address as appearing in the Register or at any other address supplied by him to the Company for the purpose or, as the case may be, by transmitting it to any such address or transmitting it to any telex or facsimile transmission number or electronic number or address supplied by him to the Company for the giving of notice or document to him or which the person transmitting the notice or document reasonably and bona fide believes at the relevant time will result in the notice or document being duly received by the Member or may also be served by advertisement in appointed newspapers (as defined in the Act) or in newspapers published daily and circulating generally in the territory of and in accordance with the requirements of the Designated Stock Exchange or, to the extent permitted by the applicable laws, by placing it on the Company s website and giving to the member a notice stating that the notice or document is available there (a notice of availability ). The notice of availability may be given to the Member by any of the means set out above. In the case of joint holders of a share all notices or documents shall be given to that one of the joint holders whose name stands first in the Register and notice or document so given shall be deemed a sufficient service on or delivery to all the joint holders. ; (k) By renumbering the existing Bye-law 161(b) as a new Bye-law 161(c) and by inserting the following new Bye-law 161(b): 161(b) if sent by electronic communication, shall be deemed to be given on the day on which it is transmitted from the server of the Company or its agent. A notice or document placed on the Company s website is deemed given by the Company to a Member on the day following that on which a notice of availability is deemed served on the Member; ; (l) By substituting for the full stop. appearing at the end of the new Bye-law 161(c) with a semi-colon ; and inserting the word and after the semi-colon ; ; (m) By adding the following new Bye-law 161(d): 161(d) may be given to a Member either in the English language or the Chinese language, subject to due compliance with all applicable Statutes, rules and regulations. ; and (n) By inserting, in Bye-law 163, after the words a cable or telex or facsimile, the following words: or electronic. By Order of the Board Lammy Lee Secretary Hong Kong, 19th March

58 Notice of Annual General Meeting Notes: (i) Any member of the Company entitled to attend and vote at the meeting is entitled to appoint a proxy or proxies to attend and vote on his behalf in accordance with the Bye-laws of the Company. A proxy need not be a member of the Company. (ii) A proxy form is enclosed and to be valid, the proxy form must be deposited at the principal place of business of the Company in Hong Kong, 33rd Floor, Harbour Centre, 25 Harbour Road, Wanchai, Hong Kong together with the power of attorney or other authority (if any) under which it is signed (or a certified copy thereof) as soon as possible but in any event not less than 48 hours before the time appointed for holding the above meeting or any adjournment thereof. (iii) The Register of Members of the Company will be closed from 20th April 2004 to 27th April 2004, both days inclusive, during which period no transfer of shares can be registered. (iv) An explanatory statement containing further details regarding Ordinary Resolutions no. 3, 6(a), 6(b) and 6(c) will be dispatched to the members of the Company together with the Annual Report of the Company for the year ended 31 December (v) Special Resolution no.7 to amend the Bye-laws of the Company for the purposes of, amongst other things, complying with the recent amendments to Appendix 3 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and generally extending the mode of communication with the members of the Company. (vi) The translation into Chinese language of this notice (including the Special Resolution which contains the proposed new Bye-laws) is for reference only. In case of any inconsistency, the English version shall prevail. 56

59 Report of the Directors The Directors present their report together with the audited Accounts of the Company for the year ended 31st December Principal Activities The principal activity of the Company is investment holding and the activities of its principal subsidiaries and jointly controlled entities are shown on pages 114 to 123. Group Results The consolidated results of the Company and its subsidiaries (collectively referred to as the Group ) are shown on page 65. Dividends The Directors have recommended a dividend for the year ended 31st December 2003 of US12.8 cents (HK$1) per ordinary share to be paid on 11th May 2004 to the shareholders of the Company whose names appear on the Register of Members of the Company on 27th April Shareholders who wish to receive dividend in US Dollars should complete the US Dollars Election Form and return it to the Branch Registrar on or before 4th May Proposed Bonus Issue The Directors have recommended a bonus share issue (the Proposed Bonus Issue ) of new shares (individually a Bonus Share and collectively the Bonus Shares ) to the shareholders of the Company on the basis of one (1) Bonus Share of US$0.10 for every ten (10) issued ordinary shares held by such shareholders whose names appear on the Register of Members of the Company on 27th April The Bonus Shares will be fully paid at par and will rank pari passu with the existing issued ordinary shares of the Company in all respects from the date of issue, except that they will not rank for the recommended final dividend or the Proposed Bonus Issue. The Proposed Bonus Issue is conditional upon (i) an ordinary resolution being passed to approve the Proposed Bonus Issue at the 2004 Annual General Meeting being duly passed; and (ii) the listing of and permission to deal in the Bonus Shares being granted by the Listing Committee of The Stock Exchange of Hong Kong Limited. Application will be made to the Listing Committee of The Stock Exchange of Hong Kong Limited for listing of, and permission to deal in, the Bonus Shares to be issued pursuant to the Proposed Bonus Issue after the ordinary resolution referred in (i) above has been duly passed at the 2004 Annual General Meeting. A circular setting out further details of the Proposed Bonus Issue will be despatched to shareholders as soon as practicable. Change of Board Lot Size The Directors have resolved to change the board lot size for trading the shares of the Company from 2,000 to 1,000. Further announcement will be made by the Company setting out the time table, trading arrangement and other details of the change in the board lot size. Directors The Directors of the Company are shown on pages 40 to

60 Report of the Directors Mr Philip Chow and Prof Richard Wong were appointed Directors of the Company with effect from 1st December They retire at the forthcoming Annual General Meeting under the provisions of the Company s Bye-laws and, being eligible, offer themselves for re-election. The Directors retiring by rotation at the forthcoming Annual General Meeting in accordance with the Company s Bye-laws are Dr Victor Fung and Mr Roger King, who, being eligible, offer themselves for re-election. Mr Nicholas D Sims has a service contract with the Company which expires on 21st October There are no other service contracts between any of the Directors of the Company and the Company or any of its subsidiaries. Directors and Chief Executive s Rights to Acquire Shares and Debt Securities During the year and as at 31st December 2003, none of the Directors nor the Chief Executive of the Company (or any of their spouses or children under 18 years of age) had been granted any right to acquire shares in or debt securities of the Company. Directors Interest 1. Significant Contracts The Group continues to share the rental of offices at Harbour Centre, Hong Kong and at Shin Osaki Kangyo Building, Shinagawa-ku, Tokyo, Japan on an actual cost reimbursement basis with Island Navigation Corporation International Limited ( INCIL ) and Island Navigation Corporation ( INC ) respectively, both owned by a Tung family trust. The total amount of rental on an actual cost reimbursement basis paid by INCIL and INC to the Group for the year ended 31st December 2003 was approximately US$545,169. Except for the above (other than contracts amongst Group companies), no other contracts of significance in relation to the Group s business to which the Company or any of its subsidiaries was a party, and in which a Director of the Company had a material interest, subsisted at the year end or at any time during the year. 2. Shares As at 31st December 2003, the issued share capital of the Company (the Issued Capital ) consisted of 470,184,544 ordinary shares (the Shares ) and the interests and short positions of the Directors and the Chief Executive of the Company in the Shares, and underlying Shares of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance ( SFO )) as recorded in the Company s register kept under section 352 of the SFO were as follows: Total Number of Shares Interested Direct Other Interests (in Long Name Interests Beneficial Voting Position) Percentage Mr C C Tung 80,835, ,158, ,994, % (Note 1) (Notes 2 & 3) Mr Roger King 80,835,548 80,835, % (Note 1) Mr T R Chang 506, , % Mr Nicholas D Sims 46,000 46, % Mr Philip Y W Chow 60,000 60, % 58

61 Notes: 1. Mr C C Tung and Mr Roger King have an interest in a trust which, through Springfield Corporation ( Springfield ), holds 80,835,548 Shares. Of such Shares, Springfield has an indirect interest in 25,425,972 Shares in which Monterrey Limited ( Monterrey ), a wholly-owned subsidiary of Springfield, has a direct interest, and Springfield has a direct interest in 55,409,576 Shares. 2. Wharncliff Limited ( Wharncliff ), a company owned by a discretionary trust established by Mrs Shirley S P Peng, a sister of Mr C C Tung and sister-inlaw of Mr Roger King, holds 229,107,662 Shares and the voting rights in respect of such holdings are held by Mr C C Tung through Tung Holdings (Trustee) Inc. Gala Way Company Inc. ( Gala Way ), a company owned by the discretionary trust established by Mrs Shirley S P Peng, holds 40,051,246 Shares and the voting rights in respect of such holdings are held by Mr C C Tung through Tung Holdings (Trustee) Inc. 3. Wharncliff, Gala Way, Springfield and Monterrey together are referred to as the controlling shareholders. Save as disclosed above, as at 31st December 2003, none of the Directors or the Chief Executive of the Company had any interest or short position in the Shares and underlying Shares of the Company or any of its associated corporation (within the meaning of the SFO) which (a) were required to be notified to the Company and The Stock Exchange of Hong Kong Limited (the Stock Exchange ) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Director or the Chief Executive is taken or deemed to have under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange. Substantial Shareholders 1. Shares As at 31st December 2003, in accordance with the register of the substantial shareholders kept by the Company under Section 336 of the SFO, the following substantial shareholders (other than a Director or Chief Executive of the Company) had interests in the Issued Capital (including short positions) representing 5% or more of the Issued Capital: Number of Nature of Shares Interested Name Interest (in Long Position) Percentage Bermuda Trust Company Limited Trustee 349,994, % (Note 1) Mrs Shirley S P Peng Founder of a discretionary 269,158, % trust (Note 2) Winfield Investment Limited Indirect 269,158, % (Notes 2 & 3) Tung Holdings (Trustee) Inc. Voting 269,158, % (Note 4) Wharncliff Limited Direct 229,107, % (Notes 2 & 5) Mr C H Tung Indirect 80,856, % (Note 6) Springfield Corporation Direct and Indirect 80,835, % (Note 6) 59

62 Report of the Directors Number of Nature of Shares Interested Name Interest (in Long Position) Percentage Archduke Corporation Beneficiary of a trust 80,835, % (Note 7) Phoenix Corporation Beneficiary of a trust 80,835, % (Note 7) Gala Way Company Inc. Direct 40,051, % (Notes 2 & 5) Monterrey Limited Direct 25,425, % (Note 8) Notes: 1. Bermuda Trust Company Limited has an indirect interest in the same Shares in which Winfield Investment Limited ( Winfield ) and Springfield, whollyowned subsidiaries of Bermuda Trust Company Limited, have an interest. 2. Mrs Shirley S P Peng, a sister of Mr C C Tung and sister-in-law of Mr Roger King, established the discretionary trust which, through Winfield, holds 269,158,908 Shares, 229,107,662 of which are owned by Wharncliff, a wholly-owned subsidiary of Winfield, and 40,051,246 of which are owned by Gala Way, a wholly-owned subsidiary of Winfield. 3. Winfield has an indirect interest in the same Shares in which Wharncliff and Gala Way, wholly-owned subsidiaries of Winfield, have an interest. 4. Tung Holdings (Trustee) Inc. is a company wholly-owned by Mr C C Tung. 5. Wharncliff and Gala Way are wholly-owned subsidiaries of Winfield. 6. Mr C H Tung, a brother of Mr C C Tung and brother-in-law of Mr Roger King, has an interest in the trust which, through Springfield, holds 80,835,548 Shares. Of such Shares, Springfield has an indirect interest in the same 25,425,972 Shares in which Monterrey, a wholly-owned subsidiary of Springfield, has a direct interest, and Springfield has a direct interest in 55,409,576 Shares. Mrs Betty Tung, the wife of Mr C H Tung, owns 20,853 Shares. 7. Archduke Corporation and Phoenix Corporation, companies which are wholly-owned by Mr C C Tung, have an interest in the trust which, through Springfield, holds 80,835,548 Shares. 8. Monterrey is a wholly-owned subsidiary of Springfield. Save as disclosed herein, as at 31st December 2003, no other person was recorded in the Company s register kept pursuant to Section 336 of the SFO as having an interest in the Issued Capital (including short positions) representing 5% or more of the Issued Capital. Save as disclosed herein, the Directors are not aware of any person, other than the persons (including his personal, family and corporate interests) as aforementioned, who had, directly or indirectly, an interest in the Issued Capital (including short positions) representing 5% or more of the Issued Capital as at 31st December

63 2. Disclosure As at 31st December 2003, the Group had the following bank borrowings requiring the controlling shareholders of the Company to retain sufficient voting power in the Company to pass ordinary resolutions during the tenure of the respective loans. Aggregate outstanding loan amount as at 31st December 2003 Tenure US$194,250, years from April 1997 US$20,741, years and 7 months from February 1998 Connected Transactions During the year, companies within the Group entered into the following transactions on normal commercial terms, and in the ordinary and usual course of the Group s activities: 1) OOCL (Taiwan) Co, Ltd ( OTWL ), the Group s Taiwan subsidiary, has been in full operation since 1st July 2000, acting as the general agent for the carrier of the Group (the Carrier ) in Taiwan. In order to provide a stable customer familiar environment, OTWL s former sub-agent CMT International Inc. ( CMT, previously known as Chinese Maritime Transport Limited), has continued to provide office services, administrative and other supporting functions to OTWL. The aggregate amount of fees paid to CMT for these services during the year were approximately US$466,000. 2) OTWL has replaced CMT in contracts for certain chassis, trucks, tractors and equipment with a company associated with Mr John Peng in Taiwan. The aggregate amount paid by the Group during the year was approximately US$12,934,000. 3) There was no slot chartering on the vessels operated by CMT during the year. 4) There was no staff secondment between CMT and the Group during the year. 5) No containers were purchased by the Group from Associated Industries China, Inc. ( AIC ) during the year. 6) Companies associated with Mr John Peng have provided the Group with services for equipment freight station depot and storage, IT support and maintenance for cranes, container inspection and crew manning services in Taiwan. The aggregate amount paid by the Group during the year was approximately US$2,917,000. Mr John Peng is the controlling shareholder of CMT, AIC and the companies associated with Mr Peng. He is a brother-in-law of Mr C C Tung, the Chairman and Chief Executive Officer of the Company. Mr Peng s wife is the sister of the wife of Mr Roger King, who is also a Director of the Company. The above transactions therefore constitute connected transactions under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ). 61

64 Report of the Directors The Independent Non-executive Directors of the Company, Mr Simon Murray, Dr Victor K Fung and Prof Richard Wong, have reviewed the above transactions and confirm that such transactions have complied with the conditions set by the Stock Exchange in 1997 in granting the waiver to the Company from the requirement of disclosure by press notice and circular to shareholders on each occasion they arise and that they were conducted on normal commercial terms, in the ordinary and usual course of business of the Group, and also within the annual limit of 6% of the consolidated net tangible assets of the Company for the year ended 31st December 2003 and the transactions were fair and reasonable so far as the shareholders of the Company were concerned. PricewaterhouseCoopers, the Auditors, have also reviewed the transactions as disclosed above. Purchase, Sale or Redemption of Shares On 7th August 2003, the Company entered into agreements with Fortwin Investment Limited and Sixpence Holdings Limited, under which the Company agreed to repurchase 15,922,000 shares and 31,035,088 shares respectively, at the price of HK$9.80 per share. The share repurchase was completed on 25th September 2003 and all the shares repurchased were then cancelled. The total number of issued ordinary shares of the Company was reduced from 517,141,632 to 470,184,544. Share Capital Pursuant to a Placing Agreement dated 13th February 2004, the Company issued 47,000,000 new shares at a price of HK$25.75 per share. Following the placing, the total number of issued ordinary shares of the Company is 517,184,544. Pre-emptive Rights No pre-emptive rights exist under Bermudan law in relation to issue of new shares by the Company. Company s Compliance with Code of Best Practice In the opinion of the Directors, the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules throughout the accounting period covered by this Annual Report except that the Non-executive Directors of the Company are not appointed for a specific term as they are subject to retirement by rotation in accordance with the Company s Bye-laws. Amendments to Bye-laws Due to the recent changes to the requirements of the Listing Rules, the Board of Directors of the Company proposes to put forward to the shareholders for approval at the Annual General Meeting of a Special Resolution to amend the Bye-laws of the Company, among other things, in the following manner: (a) to require that the minimum seven-day period for lodgment by shareholders of the notice to nominate a Director to commence no earlier than the day after the dispatch of the notice of the meeting appointed for such election and end no later than seven days before the date of such meeting; (b) to prohibit Directors from voting at and being counted towards the quorum of the Board meeting on any matter in which any of his associates has a material interest; and (c) to exclude the votes cast by a shareholder in contravention of a requirement or restriction under the Listing Rules. The amendments to the Bye-laws of the Company that are being proposed are set out in the notice of the Annual General Meeting in the Special Resolution set out on pages 52 to 55 of this Annual Report. 62

65 Property, Plant and Equipment Particulars of the movements in Property, plant and equipment are set out in note 12 to the accounts. Donations Donations made by the Group during the year amount to US$74,000. Annual General Meeting The notice of Annual General Meeting is set out on pages 50 to 56. A circular, which accompanies this Annual Report, gives details of the general mandate to authorise the allotment of and otherwise dealing with shares of all classes in the capital of the Company and securities convertible into shares and options, warrants or similar rights to subscribe for shares or such convertible securities (the Securities ) and the general mandate to authorise the repurchase of Securities (all as set out in the Notice of Annual General Meeting). Auditors The accounts have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves for re-appointment. On behalf of the Board C C Tung Chairman Hong Kong, 19th March

66 Report of the Auditors To the Shareholders of Orient Overseas (International) Limited (Incorporated in Bermuda with limited liability) We have audited the accounts on pages 65 to 123 which have been prepared in accordance with Hong Kong Financial Reporting Standards. Respective responsibilities of Directors and Auditors The Directors of the Company are responsible for the preparation of accounts which give a true and fair view. In preparing accounts which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion, solely to you, as a body, in accordance with Section 90 of the Companies Act 1981 of Bermuda and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Company s and the Group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the accounts are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion the accounts give a true and fair view of the state of affairs of the Company and of the Group as at 31st December 2003 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 19th March

67 Consolidated Profit and Loss Account For the year ended 31st December 2003 US$ 000 Note Turnover 2 3,241,113 2,457,952 Operating costs 3 (2,520,202) (2,038,912) Gross profit 720, ,040 Other operating income 4 14,875 2,822 Other operating expenses 5 (376,402) (331,016) Operating profit before financing 6 359,384 90,846 Net financing charges 8 (18,740) (30,634) Share of profits less losses of jointly controlled entities 12,662 2,690 Profit before taxation 353,306 62,902 Taxation 9 (24,145) (10,954) Profit after taxation 329,161 51,948 Minority interests (117) (210) Profit attributable to shareholders 329,044 51,738 Dividends 11 78,283 12,929 US cents US cents Earnings per ordinary share

68 Consolidated Balance Sheet As at 31st December 2003 US$ 000 Note Property, plant and equipment 12 1,579,798 1,342,438 Jointly controlled entities 14 24,298 35,576 Long-term investments 15 99, ,763 Intangible assets 16 29,817 27,541 Other non-current assets 17 36,907 33,243 Non-current assets 1,770,038 1,539,561 Properties under development and for sale 18 78,224 64,552 Debtors and prepayments , ,361 Portfolio investments 108,165 54,276 Bank balances and deposits , ,590 Current assets 984, ,779 Creditors and accruals , ,550 Current portion of long-term liabilities , ,835 Bank overdrafts and short-term loans 23 38,958 44,014 Current taxation 3,159 3,870 Current liabilities 746, ,269 Net current assets 237,984 49,510 Long-term liabilities 24 (840,677) (682,759) Other non-current liabilities 25 (48,741) (37,881) 1,118, ,431 Capital employed Share capital 29 47,018 51,714 Reserves 30 1,063, ,729 Shareholders funds 1,110, ,443 Minority interests 7,850 7,988 1,118, ,431 C C Tung Nicholas D Sims Directors 66

69 Balance Sheet As at 31st December 2003 US$ 000 Note Subsidiaries , ,378 Other non-current assets Non-current assets 329, ,433 Debtors and prepayments Bank balances and deposits 21 15,728 18,398 Current assets 15,781 18,455 Creditors and accruals 22 1,219 1,163 Current liabilities 1,219 1,163 Net current assets 14,562 17, , ,725 Capital employed Share capital 29 47,018 51,714 Reserves , ,011 Shareholders funds 344, ,725 C C Tung Nicholas D Sims Directors 67

70 Consolidated Cash Flow Statement For the year ended 31st December 2003 US$ 000 Note Cash flows from operating activities Cash generated from operations 34(a) 520, ,846 Interest paid (17,729) (23,061) Interest element of finance lease rental payments (15,296) (16,642) Dividend on preference shares (6,304) Financing charges paid (2,498) (3,499) Overseas tax paid (12,355) (5,966) Net cash from operating activities 466, ,678 Cash flows from investing activities Sale of property, plant and equipment 90,945 2,205 Sale of long-term investments 1,812 3,496 Sale of a jointly controlled entity 59 Purchase of property, plant and equipment (236,163) (64,675) Purchase of long-term investments (258) (233) Repayment of investment in a jointly controlled entity 9,500 Capital element from investments in finance leases 268 (Increase)/decrease in amounts due by jointly controlled entities (795) 1,267 Decrease/(increase) in bank deposits maturing more than three months from the date of placement 5,592 (6,735) Purchase of intangible assets (10,547) (7,088) Interest received 11,723 7,914 Long-term investment income 2 30 Portfolio investment income 7,424 1,511 Gross earnings from investments in finance leases 259 Dividends received from jointly controlled entities 9,188 9,308 Net cash used in investing activities (111,577) (52,414) Cash flows from financing activities New long-term loans 189,706 94,763 Repayment of long-term loans (139,816) (97,478) Capital element of finance lease rental payments (39,531) (53,250) Capital contribution from minority interests 3,600 Increase in short-term loans repayable more than three months from the date of advance 10,312 13,250 Repurchase of own shares (59,739) Dividends paid to shareholders (31,028) (7,757) Dividends paid to minority interests (255) (470) Net cash used in financing activities (70,351) (47,342) Net increase in cash and cash equivalents 284,586 20,922 Cash and cash equivalents at beginning of year 355, ,591 Changes in exchange rates 4,734 2,985 Cash and cash equivalents at end of year 34(c) 644, ,498 68

71 Consolidated Statement of Changes in Equity For the year ended 31st December 2003 Capital Asset Share Share redemption Contributed revaluation Retained US$ 000 capital premium reserve surplus reserve profit Total At 31st December ,714 35, ,286 9, , ,924 Changes in exchange rates 3,53 8 3,53 8 Profit for the year 51, , final dividend (7,757) (7,757) At 31st December ,714 35, ,286 9, , ,443 Changes in exchange rates 12, ,03 4 Repurchase of own shares (note 29) (4,696) 4,696 (59,739) (59,739) Profit for the year 3 29, , final dividend (12,929) (12,929) 2003 interim dividend (18,099) (18,099) At 31st December ,018 35,073 4,696 88,547 9, ,472 1,110,754 69

72 Notes to the Accounts 1. Principal accounting policies The accounts have been prepared under the historical cost convention, as modified by the revaluation of certain property, plant and equipment, and in conformity with Hong Kong Financial Reporting Standards. The principal accounting policies adopted in the preparation of these accounts are set out below. (a) Basis of consolidation The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31st December. Subsidiaries are companies in which the Group has the power to exercise control governing the financial and operating policies of the company. The consolidated accounts also include the Group s attributable share of post-acquisition results and reserves of its jointly controlled entities. Results attributable to subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from the date on which control is transferred to the Group or to the date that control ceases, as applicable. All significant inter-company transactions and balances between group companies are eliminated. (b) Goodwill and capital reserve Goodwill represents the difference between the cost of an acquisition over the fair values ascribed to the Group s share of the net assets of the acquired subsidiaries and jointly controlled entities at the effective date of acquisition. Goodwill on acquisitions is included in the balance sheet as a separate asset and amortised using the straight line method over its estimated useful life of not more than twenty years. Where the fair values ascribed to the net assets exceed the purchase consideration, such differences are recognised as income in the year of acquisition or over the weighted average useful life of the acquired non-monetary assets. The carrying amount of goodwill is reviewed annually and provision is only made where, in the opinion of the Directors, there is impairment in value other than temporary in nature. The profit or loss on disposal of subsidiaries and jointly controlled entities is calculated by reference to the net assets at the date of disposal including the attributable amount of goodwill which remains unamortised. (c) Jointly controlled entities A jointly controlled entity is a joint venture in respect of which a contractual arrangement is established between the participating venturers and whereby the Group together with the venturers undertake an economic activity which is subject to joint control and none of the venturers has unilateral control over the economic activity. Jointly controlled entities are accounted for under the equity method whereby the Group s share of profits less losses is included in the consolidated profit and loss account and the Group s share of net assets is included in the consolidated balance sheet. 70

73 1. Principal accounting policies (Continued) (d) Property, plant and equipment Property, plant and equipment are stated at cost or valuation less accumulated depreciation and provision for significant permanent impairment in values. No depreciation is provided for vessels under construction, the investment property and freehold land. The investment property, being a commercial building, is held for long-term yields and is not occupied by the Group. The investment property is carried at fair value, representing open market value determined annually based on Directors or independent valuation. A deficit in valuation is charged to the profit and loss account; an increase is first credited to the profit and loss account to the extent of valuation deficit previously charged and thereafter is credited to the assets revaluation reserve. Upon disposal of the investment property, any revaluation surplus is transferred to the profit and loss account. Other assets are depreciated, using the straight line method, to write off their cost or valuation over their estimated useful lives or if shorter, the relevant finance lease periods, to their estimated residual values. Estimated useful lives are summarised as follows: Container vessels Containers Chassis Terminal equipment and improvements Freehold buildings Medium-term leasehold land and buildings Vehicles, furniture, computer and other equipment 25 years 5 to 12 years 10 to 12 years 10 to 15 years Not exceeding 75 years Over period of the lease 5 to 10 years Major costs incurred in restoring assets to their normal working condition are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group. The carrying amounts of assets are reviewed regularly. Where the estimated recoverable amounts have declined permanently below their carrying amounts, the carrying amounts are written down to their estimated recoverable amounts. Profits and losses on disposal are determined as the difference between the net disposal proceeds and the carrying amounts of the assets and are dealt with in the profit and loss account. Upon disposal of revalued assets, any revaluation reserve is transferred directly to retained profit. 71

74 Notes to the Accounts 1. Principal accounting policies (Continued) (e) Investments Debt securities expected to be held until maturity and equity shares intended to be held for the long term are included in the balance sheet under long-term investments and are carried at cost, as adjusted for the amortisation of the premiums and discounts on acquisition, less provisions. Provision is made when, in the opinion of the Directors, there is impairment in value other than temporary in nature. Premiums or discounts on the acquisition of long-term debt securities are amortised through the profit and loss account over the period from the date of purchase to the expected date of maturity. Any profit or loss on the realisation of longterm investments is recognised as it arises and is included in the profit and loss account under other operating income. Portfolio investments comprising mainly marketable securities, which are acquired principally for the purpose of generating a profit from short-term fluctuation in price and are readily convertible into cash, are included in the balance sheet under current assets and are carried at their realisable values. Income from portfolio investments, together with surplus or deficit, including exchange differences, arising from the sale or revaluation is included in the profit and loss account under net financing charges. (f) Investments in finance leases Assets leased to third parties under agreements that transfer substantially all the risks and rewards incident to ownership of the relevant assets to the lessees are classified as investments in finance leases. The present value of the lease payments is recognised as a receivable in the balance sheet. Gross earnings under finance leases are recognised over the term of the lease using the net investment method which reflects a constant periodic rate of return on the net investment in the leases. (g) Leased assets Assets leased from third parties under agreements that transfer substantially all the risks and rewards incident to ownership of the relevant assets to the Group are classified as finance leases. At the inception of a finance lease, the fair value of the asset or, if lower, the present value of the minimum lease payments, derived by discounting them at the interest rate implicit in the lease, is capitalised as an asset; the corresponding obligations, net of finance charges, is included under long-term liabilities. Assets held under finance leases are depreciated on the basis described in note (d) above. Gross rental payable in respect of finance leases are apportioned between interest charges and a reduction of the lease obligations based on the interest rates implicit in the relevant leases. Leases where a significant portion of the risk and rewards of ownership are retained by the lessors are classified as operating leases. Rentals payable, net of incentives received from the lessors, under operating leases are charged to the profit and loss account over the periods of the respective leases on a straight line basis or another systematic basis which is representative of the time pattern of the benefit to the lessees. 72

75 1. Principal accounting policies (Continued) (h) Computer software development costs Costs that are directly associated with identifiable and unique software products controlled by the Group and have probable economic benefit exceeding the cost beyond one year are recognised as intangible assets. Direct costs include staff costs of the software development team and an appropriate portion of relevant overheads. Other costs associated with developing and maintaining computer software programmes are recognised as an expense as incurred. Expenditure which enhances or extends the performance of computer software programmes beyond their original specifications is recognised as a capital improvement and added to the original cost of the software. Computer software development costs recognised as assets are amortised on completion of development using the straight line method over their estimated useful lives of five years. (i) Deferred expenditure Expenses incurred in connection with long-term financing and leasing arrangements are deferred and amortised on a straight line basis over the relevant tenure of the loan and lease periods. Expenditure associated with the leasing of the investment property is deferred and amortised on a straight line basis over a period of up to five years. (j) Properties held for sale Properties under development for sale are included under current assets and comprise land at cost, construction costs and any interest capitalised, less provisions for foreseeable losses. Completed properties held for sale are carried at the lower of cost and net realisable value. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses. (k) Provisions Provisions are recognised when there is a present legal or constructive obligation as a result of past events. It is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where a provision is expected to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Restructuring provisions mainly comprise lease termination penalties and employee termination payments, and are recognised in the period in which the Group becomes legally or constructively committed to payment. Employee termination benefits are recognised only after either an agreement is in place with the appropriate employee representatives specifying the terms of redundancy and the number of employees affected, or after individual employees have been advised of the specific terms. Costs related to the ongoing activities of the Group are not provided in advance. Any property, plant and equipment that are no longer required for their original use are transferred to current assets and carried at the lower of the carrying amount or estimated net realisable value. 73

76 Notes to the Accounts 1. Principal accounting policies (Continued) (l) Deferred taxation Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. The principal temporary differences arise from depreciation on property, plant and equipment, provisions for retirement benefits and tax losses carried forward. Tax rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation. Deferred taxation assets relating to carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Deferred taxation is provided on temporary differences arising on investments in subsidiaries and jointly controlled entities, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. (m) Employee benefits The Group operates a number of defined benefit and defined contribution pension and retirement benefit schemes in the main countries in which the Group operates. These schemes are generally funded by payments from employees and by relevant group companies, taking into account of the recommendations of independent qualified actuaries where required. Contributions under the defined contribution schemes are charged to the profit and loss account in the year to which the contributions relate. For the defined benefit pension schemes, annual contributions are made in accordance with the advice of qualified actuaries for the funding of retirement benefits in order to build up reserves for each scheme member during the employee s service life and which are used to pay to the employee or dependent a pension after retirement. Such pension costs are assessed using the projected unit credit method, under which, the cost of providing pensions is charged to the profit and loss account so as to spread the regular cost over the service lives of employees in accordance with the advice of the actuaries with full valuation of the plans every two to three years. The pension obligations are measured as the present value of the estimated future cash outflows using interest rates of high quality corporate bonds which have terms to maturity approximating the terms of the related liabilities. Plan assets are measured at fair values. Actuarial gains and losses are recognised in the profit and loss account over the expected average remaining service lives of employees to the extent of the amount in excess of 10% of the greater of the present value of the plan obligations and the fair value of plan assets. Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave. Provisions for bonus plans due wholly within twelve months after balance sheet date are recognised when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made. 74

77 1. Principal accounting policies (Continued) (n) Revenue recognition Freight revenues from the operation of the international containerised transportation business are recognised on a percentage of completion basis, which is determined on the time proportion method of each individual vessel voyage. Revenues from the operation of container terminals and provision of other services are recognised when services are rendered or on an accrual basis. Rental income under operating leases is recognised over the periods of the respective leases on a straight line basis. Sales of properties under construction are recognised over the course of development based on the proportion of construction work completed or if lower, the proportion of sales proceeds received. Sales of completed properties are recognised upon completion of the sale and purchase contracts. (o) Vessel repairs and surveys Dry-docking and special survey costs for vessels are charged to the profit and loss account as incurred. (p) Borrowing costs Interest and related costs on borrowings directly incurred to finance the construction or acquisition of an asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. (q) Financial instruments The Group enters into financial instruments, including futures, forward, swap and option transactions, in order to hedge its exposure to fluctuations in foreign exchange, interest rates and other operating costs as part of the Group s risk management strategy against assets, liabilities, position or cash flows measured on an accrual basis. These financial instruments are accounted for on an equivalent basis to the underlying assets, liabilities or net positions at the balance sheet date. Any profit or loss arising is recognised on the same basis as that arising from the related assets, liabilities or positions. Premiums on options are however charged to the profit and loss account as they are incurred. Unrealised gains and losses at the balance sheet date on open exchange contracts for future obligations are dealt with in the profit and loss account. (r) Cash and cash equivalents Cash and cash equivalents comprise cash and bank balances, deposits with banks and financial institutions repayable within three months from the date of placement and portfolio investments which are readily convertible into cash, net of bank overdrafts and advances from banks and financial institutions repayable within three months from the date of advance. (s) Foreign currencies The functional currency of the Group is US dollar. Transactions in other currencies during the year are converted at rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in other currencies at the balance sheet date are translated at rates of exchange ruling at that date. Exchange differences arising are dealt with in the profit and loss account. Profit and loss accounts of subsidiaries expressed in other currencies are translated at the weighted average exchange rates for the year and balance sheets are translated at the exchange rates ruling at the balance sheet date. Exchange differences arising from the translation of net investment in foreign subsidiaries are taken directly to reserves. 75

78 Notes to the Accounts 2. Turnover US$ International transportation and logistics 2,969,554 2,218,120 Container terminals 251, ,748 Property investment and development 20,534 24,084 3,241,113 2,457,952 The principal activities of the Group are international transportation and logistics, container terminals, property investment and development. Turnover represents gross freight, charterhire, service and other income from the operation of the international containerised transportation, logistics and container terminal businesses, sales of properties and rental income from the investment property. 3. Operating costs US$ Cargo 1,253,669 1,013,763 Vessel and voyage 630, ,820 Equipment and repositioning 446, ,111 Terminal operating 180, ,542 Property management and development 8,924 8,676 2,520,202 2,038,912 76

79 4. Other operating income US$ Long-term investment income, listed 2 30 Profit on disposal of long-term investments Write back of provision for diminution in value of long-term investments 222 Profit on disposal of a jointly controlled entity 4 Profit on disposal of property, plant and equipment 1,914 Exchange gain 8,095 1,625 Others 4, ,875 2, Other operating expenses US$ Business and administrative 366, ,815 Corporate 9,710 7,815 Loss on disposal of property, plant and equipment 2, , ,016 77

80 Notes to the Accounts 6. Operating profit before financing US$ Operating profit before financing is arrived at after crediting: Operating lease rental income Land and buildings 20,046 18,510 Reduction in terminal lease rental payments 14,254 Gross earnings on finance leases 259 and after charging: Depreciation Owned assets 68,074 63,172 Leased assets 46,666 38,776 Operating lease rental expense Vessels and equipment 362, ,978 Land and buildings 21,759 27,919 Staff costs General and administrative staff 292, ,752 Terminal workers 151, ,639 Crew and seamen 19,631 18,257 Amortisation of intangible assets 11,752 12,120 Auditors remuneration 1,825 1, Directors remuneration US$ Fees Salaries and other emoluments 1,709 1,674 Discretionary bonuses Retirement benefits ,527 2,691 78

81 7. Directors remuneration (Continued) The emoluments of individual Directors fall within the following bands: Number of Directors Emoluments bands (US$) Nil ~ 128,200 (Nil ~ HK$1,000,000) ,501 ~ 384,600 (HK$2,500,001 ~ HK$3,000,000) ,601 ~ 448,700 (HK$3,000,001 ~ HK$3,500,000) 1 448,701 ~ 512,800 (HK$3,500,001 ~ HK$4,000,000) 1 769,231 ~ 833,300 (HK$6,000,001 ~ HK$6,500,000) 2 833,301 ~ 897,400 (HK$6,500,001 ~ HK$7,000,000) 1 897,401 ~ 961,500 (HK$7,000,001 ~ HK$7,500,000) None of the Directors has waived the right to receive their emoluments. Fees and other emoluments paid to non-executive directors amount to US$14,400 (2002: US$13,000) and US$35,200 (2002: US$32,000), respectively. Details of the emoluments paid to the five individuals, including three (2002: two) Directors, whose emoluments were the highest in the Group are: US$ Salaries and other emoluments 2,419 2,262 Discretionary bonuses 562 1,012 Retirement benefits ,247 3,577 79

82 Notes to the Accounts 7. Directors remuneration (Continued) The emoluments of the five individuals fall within the following bands : Number of individuals Emoluments bands (US$) ,601 ~ 448,700 (HK$3,000,001 ~ HK$3,500,000) 1 448,701 ~ 512,800 (HK$3,500,001 ~ HK$4,000,000) 1 512,801 ~ 576,900 (HK$4,000,001 ~ HK$4,500,000) 1 576,901 ~ 641,000 (HK$4,500,001 ~ HK$5,000,000) 1 705,101 ~ 769,200 (HK$5,500,001 ~ HK$6,000,000) 1 769,201 ~ 833,300 (HK$6,000,001 ~ HK$6,500,000) ,301 ~ 897,400 (HK$6,500,001 ~ HK$7,000,000) 1 897,401 ~ 961,500 (HK$7,000,001 ~ HK$7,500,000) The Group usually determines and pays discretionary bonuses to employees around May each year based on the actual financial results of the Group for the previous year. The discretionary bonuses shown above therefore represent actual payments to the Directors and individuals during the current financial year in relation to performance for the preceding year. 80

83 8. Net financing charges US$ Interest expense Bank loans, overdrafts and other loans wholly repayable within five years 18,182 22,677 Finance lease obligations Wholly payable within five years 8,911 11,798 Not wholly payable within five years 6,435 4,670 33,528 39,145 Amount capitalised under assets (2,636) (2,213) 30,892 36,932 Interest income (14,020) (11,079) Net interest expense 16,872 25,853 Dividend on preference shares (note 26) 6,794 2,793 Financing charges 2,498 3,499 Portfolio investment income (7,424) (1,511) 18,740 30,634 Financing charges include the funding costs reimbursed to TAPCO (note 20) amounting to US$1.6 million (2002: US$2.6 million). 81

84 Notes to the Accounts 9. Taxation US$ Current (overseas) Company and subsidiaries 16,349 3,301 Jointly controlled entities 6,047 3,727 22,396 7,028 Deferred Company and subsidiaries 1,749 3,926 24,145 10,954 Taxation has been provided at the appropriate tax rates prevailing in the countries in which the Group operates on the estimated assessable profits for the year. These rates range from 10% to 53% and the rate applicable for Hong Kong profits tax is 17.5% (2002: 16%). The tax of the Group s profit before taxation differs from the theoretical amount that would arise using the applicable tax rate, being the weighted average of rates prevailing in the territories in which the Group operates, as follows: US$ Profit before taxation 353,306 62,902 Tax calculated at applicable tax rate 76,579 16,585 Income not subject to tax (63,490) (16,322) Expenses not deductible for tax purposes 14,695 6,807 Tax losses not recognised 3,756 2,010 Temporary differences not recognised 2,813 2,629 Utilisation of previously unrecognised tax losses (11,043) (113) Recognition of previously unrecognised deferred tax assets (523) (26) Recognition of previously unrecognised temporary differences (254) (403) Withholding tax Increase in tax rate 40 Other items 637 (628) 24,145 10,954 82

85 10. Earnings per ordinary share The calculation of earnings per ordinary share is based on the profit attributable to ordinary shareholders of US$329.0 million (2002: US$51.7 million) and the weighted average number of million (2002: million) ordinary shares in issue during the year. 11. Dividends US$ Interim paid of US3.85 cents (2002: nil) per ordinary share 18,099 Proposed final of US12.8 cents (2002: US2.5 cents) per ordinary share 60,184 12,929 78,283 12,929 The Board of Directors proposes a final dividend in respect of 2003 of US12.8 cents (2002: US2.5 cents) per ordinary share. This dividend will be accounted for as an appropriation of retained profit in the year ending 31st December

86 Notes to the Accounts 12. Property, plant and equipment Vehicles, Terminal Land and buildings furnitures, Vessels equipment outside Hong Kong computer Container under and Medium-term and other US$ 000 vessels construction Containers Chassis improvements Freehold leasehold equipment Total Group Cost or valuation At 31st December , , , , , ,368 28, ,827 2,046,074 Changes in exchange rates 1,043 23, ,607 28,766 Additions , ,720 9,204 49,397 10,000 19, ,773 Reclassification 211,657 (211,657 ) Disposals (98,082 ) (17,232 ) (8,044 ) (2,711 ) (17,478 ) (143,547 ) At 31st December ,043, , , , , ,607 26, ,319 2,355,066 Accumulated depreciation At 31st December , ,023 76,867 86,276 23,188 8,766 83, ,636 Changes in exchange rates 579 8, ,127 11,408 Charge for the year 35,863 44,037 7,039 17,657 1,645 1,812 6, ,740 Disposals (14,074 ) (14,522 ) (6,829 ) (1,866 ) (17,225 ) (54,516 ) At 31st December , ,538 84, ,672 24,872 8,807 75, ,268 Net book amount At 31st December , , ,327 35, , ,735 17,333 32,871 1,579,798 At 31st December , , ,354 33, , ,180 19,663 18,968 1,342,438 Net book amount of leased assets At 31st December , ,867 26,913 77, ,080 At 31st December ,760 24,181 57, ,288 84

87 12. Property, plant and equipment (Continued) (a) Freehold land and buildings include the investment property, Wall Street Plaza, a commercial property located at 88, Pine Street, New York, USA. The property is situated on three parcels of freehold land, two of which are wholly owned by the Group. The freehold interest in the third parcel, representing approximately 10% of the site, is owned 50% by the Group and under a long-term lease to the Group expiring in the year 2066 (2002: 2 parcels of about 34% were held under leases). The property is stated at Directors valuation of US$100.0 million (2002: US$90.0 million), by reference to a professional valuation made in December 2003 on an open market basis. (b) (c) (d) (e) Container vessels include three (2002: three) vessels which were previously operated under finance lease terms and direct ownership was acquired by the Group in May These vessels are carried at Directors valuation, representing the then purchase consideration which was determined by reference to professional valuations on a cum-charter open market basis of US$87.0 million. Subsequent revaluations of these vessels are not required to be made in accordance with paragraph 72 of Hong Kong Statement of Standard Accounting Practice 17 Property, plant and equipment. Had these vessels been carried at cost, the net book amount of the container vessels would have been reduced by US$2.7 million (2002: US$3.1 million). Apart from the investment property and container vessels mentioned under (a) and (b) above, all other property, plant and equipment are carried at cost. The aggregate net book amount of assets pledged as securities for loans amounts to US$999.0 million (2002: US$976.7 million). Specific charges on vessels of the Group include legal mortgages and assignments of insurance claims and charterhire income relating to these vessels. Interest costs of US$1.6 million (2002: US$1.7 million) during the year were capitalised as part of vessels under construction. 13. Subsidiaries US$ Company Unlisted shares, at cost less provision 169, ,482 Amounts receivable 688, ,994 Amounts payable (528,013) (217,098) 329, ,378 Particulars of the principal subsidiaries at 31st December 2003 are shown on pages 114 to 123. The amounts receivable and payable are unsecured, interest free and have no specific repayment terms. 85

88 Notes to the Accounts 14. Jointly controlled entities US$ Group Unlisted shares, at cost less provision 12,905 22,520 Share of retained post-acquisition (losses)/profits (347) 2,111 Share of net assets 12,558 24,631 Amounts receivable 11,740 10,945 24,298 35,576 Particulars of the principal jointly controlled entities at 31st December 2003 are shown on page 123. The amounts receivable are unsecured, interest free and have no specific repayment terms. 15. Long-term investments US$ Group Investment in Hui Xian, at cost 93,601 93,601 Unlisted, at cost less provisions 5,617 7,162 99, ,763 The investment in Hui Xian represents the Group s approximately 8% (2002: 8%) unlisted equity interest in and advances to Hui Xian Holdings Limited ( Hui Xian ), incorporated in Hong Kong and the holding company for the Beijing Oriental Plaza, which comprises a commercial, retail and residential complex of approximately six million square feet, the development of which was completed in mid The major shareholder of Hui Xian, which holds approximately 52% of the issued equity, has also been appointed the project manager of the development. Under the Hui Xian shareholders agreement, the shareholders agreed to finance the development costs up to US$1.9 billion in proportion to their shareholdings. If the development costs exceed US$1.9 billion and any shareholders decide not to provide their share of the finance, the Group s percentage of shareholding in Hui Xian will be adjusted in accordance with the proportion of finance provided by the shareholders. In addition to the finance from the shareholders, Hui Xian has arranged a bank loan of US$275 million (2002: RMB3,460 million and US$120 million), over which the Group has provided a proportionate guarantee (note 32 (a)). 86

89 16. Intangible assets US$ Group Computer software development costs 48,336 42,123 Property leasing expenses 24,936 20,129 Financing charges 6,295 3,287 79,567 65,539 Accumulated amortisation (49,750) (37,998) Net book value 29,817 27,541 Net book value at beginning of year 27,541 32,568 Changes in exchange rates 5 Additions 14,028 7,088 Amortisation (11,752) (12,120) Net book value at end of year 29,817 27, Other non-current assets US$ Group Restricted bank balances and deposits (note 21) 20,802 21,580 Deferred taxation assets (note 27) 10,960 6,541 Pension and retirement assets (note 28) 5,145 5,122 36,907 33,243 Company Restricted bank balances and deposits (note 21)

90 Notes to the Accounts 18. Properties under development and for sale Interest costs of US$1.0 million (2002: US$0.5 million) during the year were capitalised as part of properties under development. 19. Debtors and prepayments US$ Group Trade debtors (note 20) 115,650 81,865 Other debtors 26,901 28,027 Prepayments 48,611 36,501 Utility and other deposits 29,126 21,681 Bunker 24,257 19,483 Tax recoverable 2,099 6, , ,361 Company Other debtors 2 Prepayments Trade debtors In 1998, the Group entered into a receivables purchase agreement (the Agreement ) under which the Group agreed to assign, from time to time, certain specific trade receivables to The Rhino Receivables Company Limited ( Rhino ), a Channel Island unrelated special purpose company. The Group can offer to sell, at the time of each aforesaid assignment, a certain portion of those receivables, subject to a specified accumulated maximum amount, to Tulip Asset Purchase Company BV ( TAPCO ), a Netherlands unrelated special purpose company. Rhino holds all such trade receivables on trust for the benefit of the Group and TAPCO. Under the Agreement, TAPCO will settle in cash on the date of sale a fixed portion of the purchase price of the trade receivables, representing approximately 91% of those trade receivables on the date of sale with the balance on final settlement. TAPCO funds the purchases of the receivables by cash advances from Tulip Funding Corporation, a United States unrelated special purpose company, which in turn issues US dollar floating rate commercial papers backed by such receivables, supplemented by letter of credit and liquidity arrangements from a bank. The Group continues to manage the trade receivables and acts as collection agent for Rhino. The Group also agrees to reimburse all funding costs incurred by TAPCO in relation to the purchases of the trade receivables from the Group. Upon collection of all trade receivables sold, TAPCO will settle the balance of the purchase price, after deducting any funding costs not yet reimbursed and bad debts arising from those trade receivables. 88

91 20. Trade debtors (Continued) As at 31st December 2003, trade debtors of the Group include the following trade receivables: US$ Gross trade receivables assigned to Rhino 164, ,350 Less non-returnable proceeds received from TAPCO (99,500) (99,500) 64,567 28,850 Trade receivables are normally due for payment on presentation of invoices or granted with an approved credit period ranging mainly from 10 to 45 days. Debtors with overdue balances are requested to settle all outstanding balances before any further credit is granted. The ageing analysis of the Group s trade debtors, including those assigned to Rhino but net of provision for bad and doubtful debts, prepared in accordance with the due date of invoices, is as follows: US$ Below one month 194, ,137 Two to three months 19,575 24,621 Four to six months 1,162 4,329 Over six months , ,365 89

92 Notes to the Accounts 21. Bank balances and deposits US$ Group Restricted 127, ,312 Not restricted 536, , , ,170 Less restricted and included in Non-current assets (note 17) (20,802) (21,580) Non-current liabilities (note 26) (91,975) (100,000) 551, ,590 Company Restricted Not restricted 15,728 18,398 15,785 18,453 Less restricted and included in Non-current assets (note 17) (57) (55) 15,728 18,398 Restricted bank balances and deposits are funds which are pledged as securities for banking facilities and performance under leasing arrangements or required to be utilised for specific purposes. A restricted deposit of the Group amounting to US$15.0 million (2002: US$30.4 million), which has been pledged as security for a short-term bank loan of the same amount (note 23), is not classified as a non-current asset. 90

93 22. Creditors and accruals US$ Group Trade creditors 141, ,613 Other creditors 30,877 26,177 Accrued operating expenses 278, ,263 Deferred revenue 36,073 15, , ,550 Company Accrued operating expenses 1,219 1,163 The ageing analysis of the Group s trade creditors, prepared in accordance with date of invoices, is as follows: US$ Below one month 82,741 65,155 Two to three months 52,559 49,255 Four to six months 2,402 2,237 Over six months 3,497 1, , ,613 91

94 Notes to the Accounts 23. Bank overdrafts and short-term loans US$ Group Short-term loans Secured 29,283 35,998 Unsecured 9,625 8,000 Bank overdrafts Unsecured ,958 44,014 A secured bank loan of US$15.0 million (2002: US$30.4 million) is secured by a bank deposit of the same amount (note 21). 24. Long-term liabilities US$ Group Bank loans Secured 594, ,788 Unsecured 51,405 Other loans wholly repayable within five years Secured 15,541 21,606 Unsecured 2,580 Finance lease obligations Wholly payable within five years 190, ,079 Not wholly payable within five years 205,027 50,121 1,059, ,594 Current portion included in current liabilities (218,527) (168,835) 840, ,759 92

95 24. Long-term liabilities (Continued) (a) The maturity of the Group s bank loans, other loans and finance lease obligations is as follows: Finance leases Bank Other Present Minimum US$ 000 loans loans value payments As at 31st December ,053 7,271 51,203 65, ,818 5,268 34,727 47, ,478 4,659 73,647 84, , ,823 51, , ,735 13, onwards 210, , , ,739 18, , ,448 As at 31st December ,017 6,819 36,999 51, ,643 7,882 45,249 56, ,106 3,718 30,274 39, ,652 3,150 68,349 75, , ,355 43, onwards 180,532 17,974 19, ,788 21, , ,218 (b) The bank loans, other loans and finance lease obligations carry interest at fixed rates, ranging from 3.5% to 10.6% per annum, or variable rates, varying from 0.3% to 2.2% over stipulated market rates per annum. 25. Other non-current liabilities US$ Group Redeemable preference shares (note 26) Deferred taxation liabilities (note 27) 37,624 29,141 Pension and retirement liabilities (note 28) 11,117 8,740 48,741 37,881 93

96 Notes to the Accounts 26. Redeemable preference shares US$ Group Redeemable preference shares and premium 91, ,000 Less restricted deposits under the put options (note 21) (91,975) (100,000) In June 2002, the Group entered into, inter alia, a Shareholders Agreement with, inter alios, two unrelated third parties (together the Preference Shareholders ) in relation to a subsidiary. Under the Shareholders Agreement, the Preference Shareholders acquired from the Group 90 cumulative preference shares (the Preference Shares ) of 150 each in this subsidiary and contributed an aggregate of US$100.0 million less the nominal value of the Preference Shares as share premium (the Premium ). The Preference Shareholders are entitled to receive annual dividends of 7.08% per annum on the aggregate amount of the nominal value of the Preference Shares and Premium (collectively Preference Shares Contributions ) outstanding from time to time. To the extent permitted by local law, the Preference Shareholders may propose a repayment of the Premium annually, provided that such repayment does not exceed a maximum percentage specified in the Shareholders Agreement. During the year, Premium amounting to US$8.0 million was repaid to the Preference Shareholders. The Preference Shareholders have been granted irrevocable options to sell their Preference Shares to the Group under certain circumstances. As securities for the options, the Group has placed certain bank deposits (the Deposits ) equivalent to the outstanding Preference Shares Contributions, amounting to US$92.0 million (2002: US$100.0 million), and has pledged the Deposits in favour of the Preference Shareholders. The consideration for the Preference Shares under the options is equal to the Preference Shares Contributions outstanding plus the accrued interest from the Deposits. The Group has also given irrevocable instructions to the banks to pay the Deposits and accrued interest to the Preference Shareholders upon receiving relevant notices from them. In view of the various arrangements, the Directors consider it fair and appropriate to deduct the Deposits from the redeemable Preference Shares Contributions in the accounts. 94

97 27. Deferred taxation assets/(liabilities) US$ Group Deferred taxation assets (note 17) 10,960 6,541 Deferred taxation liabilities (note 25) (37,624) (29,141) (26,664) (22,600) Deferred taxation assets and liabilities are offset when there is a legal right to set off current taxation assets with current taxation liabilities and when the deferred taxation relates to the same authority. The above assets/(liabilities) shown in the consolidated balance sheet are determined after appropriate offsetting of the relevant amounts and include the following: US$ Group Deferred taxation assets to be recovered after more than twelve months 4,455 5,771 Deferred taxation liabilities to be settled after more than twelve months (37,396) (28,291) 95

98 Notes to the Accounts 27. Deferred taxation assets/(liabilities) (Continued) Deferred taxation is calculated in full on temporary differences under the liability method using applicable tax rates prevailing in the countries in which the Group operates. Movements on the deferred taxation account are as follows: Accelerated depreciation Revenue Tax US$ 000 allowances expenditure losses Pensions Total Deferred taxation assets At 31st December ,077 2,037 1,857 9,561 Changes in exchange rates (2) (2) Credited/(charged) to profit and loss account (497) 479 1,095 (905) 172 At 31st December ,554 3, ,731 Changes in exchange rates Credited/(charged) to profit and loss account (93) 1, ,757 At 31st December ,330 3,880 1,541 12,751 96

99 27. Deferred taxation assets/(liabilities) (Continued) Accelerated depreciation Investment US$ 000 allowances property Pensions Total Deferred taxation liabilities At 31st December ,301 17, ,337 Changes in exchange rates (104) (104) Charged to profit and loss account 2,490 1, ,098 At 31st December ,687 18, ,331 Changes in exchange rates 2, ,578 Charged/(credited) to profit and loss account 4, (166) 4,506 At 31st December ,271 19, ,415 Deferred taxation assets of US$33.2 million (2002: US$30.0 million) arising from unused tax losses of US$164.2 million (2002: US$145.5 million) have not been recognised in the accounts. Unused tax losses of US$162.0 million (2002: US$132.3 million) have no expiry date and the balance will expire at various dates up to and including Deferred taxation liabilities of US$7.0 million (2002: US$5.4 million) on temporary differences associated with investments in subsidiaries of US$105.5 million (2002: US$93.4 million) have not been recognised as there is no current intention of remitting the retained profits of these subsidiaries to the holding companies. 97

100 Notes to the Accounts 28. Pension and retirement benefits The Group operates a number of defined benefits and defined contribution pension and retirement schemes in the main countries in which the Group operates. The total charges to the profit and loss account for the year were US$16.2 million (2002: US$11.7 million). The principal defined contribution schemes are operated in Hong Kong, the USA and Canada. These schemes cover approximately 72% of the Group s employees. Contributions to the defined contribution schemes, all the assets of which are held in trust funds separate from the Group, are based on a percentage of employee salary, depending upon the length of service of the employee, but the Group s contributions to certain schemes may be reduced by contributions forfeited by those employees who leave the schemes prior to vesting fully in those contributions. The charges for the defined contribution schemes to the profit and loss account during the year are as follows: US$ Contributions to the schemes 11,332 10,773 Forfeitures utilised (49) (89) 11,283 10,684 The principal defined benefit schemes are operated in the USA, United Kingdom and Canada. The defined benefit schemes cover approximately 14% of the Group s employees and are fully funded, with the exception of two smaller schemes and certain post retirement benefits. The assets of the funded schemes are held in trust funds separate from the Group. Contributions to these schemes are assessed in accordance with the advice of qualified actuaries in compliance with local practice and regulations. The actuarial assumptions used to calculate the projected benefit obligations of the Group s pension schemes vary according to the economic conditions of the country in which they are situated. Actuary valuations for these schemes are carried out by independent professionally qualified actuaries ranging between two to three years. 98

101 28. Pension and retirement benefits (Continued) The net assets/(liabilities) for the defined benefit schemes are recognised in the balance sheet as follows: US$ Fair value of plan assets 229, ,814 Present value of funded obligations (263,382) (223,779) Net funded obligations (33,538) (23,965) Present value of unfunded obligations (5,682) (3,447) Unrecognised actuarial losses 31,902 22,183 Unrecognised prior service cost 841 1,012 Unrecognised other assets Net pension and retirement liabilities (5,972) (3,618) Representing: Pension and retirement assets (note 17) 5,145 5,122 Pension and retirement liabilities (note 25) (11,117) (8,740) (5,972) (3,618) Movements of the net liabilities during the year are as follows: US$ Balance at beginning of year (3,618) (6,011) Changes in exchange rates (352) (137) Net expense recognised in profit and loss account (4,962) (975) Contributions paid 2,960 3,505 Balance at end of year (5,972) (3,618) 99

102 Notes to the Accounts 28. Pension and retirement benefits (Continued) The charges for the defined benefit schemes are recognised in the profit and loss account as follows: US$ Current service cost 3,536 2,803 Interest cost 13,726 11,409 Expected return on plan assets (12,956) (11,757) Amortisation of past service cost Net actuarial loss Loss/(gain) on curtailments and settlements 118 (2,656) Net expense recognised for the year 4, The main actuarial assumptions made for the principal defined benefit schemes were as follows: Discount rate 1 to 8% 2 to 7% Expected return on plan assets 2 to 8% 1 to 8% Expected future salary increases 3 to 7% 3 to 9% Actual return on plan assets (US$ 000) 20,885 (3,774) 29. Share capital US$ Authorised: 900,000,000 ordinary shares of US$0.10 each 90,000 90,000 65,000,000 convertible redeemable preferred shares of US$1 each 65,000 65,000 50,000,000 redeemable preferred shares of US$1 each 50,000 50, , ,000 Issued and fully paid: 470,184,544 (2002: 517,141,632) ordinary shares of US$0.10 each 47,018 51,

103 29. Share capital (Continued) On 7th August 2003, the Company entered into agreements with Fortwin Investment Limited and Sixpence Holdings Limited, under which the Company agreed to repurchase an aggregate of 46,957,088 of its ordinary shares at the price of HK$9.80 per share. The share repurchase was approved by the disinterested shareholders at the Special General Meeting held on 22nd September 2003 and completed on 25th September All the shares repurchased were then cancelled. Subsequent to the balance sheet date, the Company allotted and issued 47,000,000 new ordinary shares of US$0.10 each under a placing agreement dated 13th February 2004 at an issue price of HK$25.75 per share for cash to be used for working capital and general corporate purposes of the Company. All the new shares rank pari passu with the existing shares. 30. Reserves US$ Group Share premium 35,073 35,073 Capital redemption reserve 4,696 Asset revaluation reserve 9,948 9,948 Contributed surplus 88, ,286 Retained profit 925, ,422 1,063, ,729 Company Share premium 35,073 35,073 Capital redemption reserve 4,696 Contributed surplus 88, ,286 Retained profit 169, , , ,011 The results attributable to shareholders for the year is dealt with in the accounts of the Company to the extent of a loss of US$0.5 million (2002: US$0.1 million). Under the Companies Act of Bermuda and the Bye-laws of the Company, the contributed surplus is also distributable. Accordingly, total distributable reserves of the Company amount to US$257.7 million (2002: US$348.9 million) as at 31st December

104 Notes to the Accounts 31. Commitments Group (a) Capital commitments US$ Contracted but not provided for 653, ,407 Authorised but not contracted for 214, , , ,580 The commitments include the balance of the purchase cost of ten 8,063 TEU container vessels (2002: eight 8,063 TEU and one 4,402 TEU ice-strengthened container vessels) to be delivered between 2004 to In March 2002, the Group entered into agreements under which two 8,063 TEU container vessels will be sold to third parties at considerations equal to the acquisition costs to the Group upon delivery in The Group also entered into agreements to bareboat charter these two vessels under operating lease terms for minimum periods ranging from nine to twelve years from their respective dates of delivery. 102

105 31. Commitments (Continued) Group (Continued) (b) Operating lease commitments The future aggregate minimum lease rental expense under non-cancellable operating leases are payable in the following years: Vessels and Land and US$ 000 equipment buildings Total As at 31st December ,425 41, , ,986 36, , ,582 31, , ,902 31, , ,857 30, , onwards 995, ,386 1,409,235 1,877, ,928 2,461,529 As at 31st December ,171 22, , ,958 32, , ,757 29, , ,473 25, , ,437 24, , onwards 215, , , , ,377 1,494,

106 Notes to the Accounts 31. Commitments (Continued) Group (Continued) (c) Operating lease rental receivable The future aggregate minimum lease rental income under non-cancellable operating leases are receivable in the following years: US$ 000 Land and buildings As at 31st December , , , , , onwards 34, ,573 As at 31st December , , , , , onwards 36, , Contingent liabilities Group (a) Guarantees in respect of loan facilities given for: Facilities Utilised US$ Hui Xian (note 15) 22,000 43,100 22,000 30,

107 32. Contingent liabilities (Continued) Group (Continued) (b) Litigation The Group is a member of the Trans-Atlantic Conference Agreement ( TACA ) and involved in litigation with the European Commission as more fully described in note 33 (c) to the 2002 Annual Accounts. In September 2003, the European Court of First Instance delivered its judgement annulling the decisions of the Commission and all the fines imposed on the TACA parties, including the Group. The Commission has not, so far, lodged any further appeal to the European Court of Justice. Company (a) Guarantees in respect of loans, finance lease obligations and bank overdraft facilities given for: Facilities Utilised US$ Subsidiaries 1,052,136 1,096, , ,371 Hui Xian (note 15) 22,000 43,100 22,000 30,540 1,074,136 1,139, , ,911 (b) The Company has given guarantees for its subsidiaries in respect of future payment of operating lease rentals amounting to US$246.3 million (2002: US$266.3 million). (c) The Company has provided an undertaking to the Foreign Investment Commission of Shanghai Municipal Government for a subsidiary in respect of its capital contribution for property development projects in the People s Republic of China. As at 31st December 2003, the outstanding contribution amounted to US$5.5 million (2002: US$8.5 million). 105

108 Notes to the Accounts 33. Financial instruments Contract amount Replacement cost US$ Interest rate swap agreements 100, ,000 (1,588) (4,055) Forward foreign exchange contracts 1, Foreign exchange option contracts 20,000 (12) 101, ,000 (1,547) (4,067) The Group manages its exposure to fluctuations of foreign currencies, interest rates and bunker prices through a comprehensive set of procedures, policies and limits approved by the Committees of the Board of Directors. The Group does not engage in any transactions for speculative or dealing purposes. The above financial instruments arise from future, forward, swap and option transactions undertaken by the Group to hedge against assets, liabilities or positions. The notional or contractual amounts of these instruments indicate the volume of these transactions outstanding at the balance sheet date and they do not represent amounts at risk. The exposure to credit risk is limited to the settlement amount owing by counterparties, which are reputable financial institutions. The replacement cost of contracts represents the mark to market value of all contracts, which is estimated by reference to indicative market rates for these contracts, at the balance sheet date. The majority of the results relating to the unexpired contracts are recognised with the underlying transactions. In accordance with the Group s accounting policies, any unrealised gains or losses on open exchange contracts at the balance sheet date is dealt with in the profit and loss account. 106

109 34. Notes to consolidated cash flow statement (a) Reconciliation of operating profit before financing to cash generated from operations US$ Operating profit before financing 359,384 90,846 Depreciation 114, ,948 (Profit)/loss on disposal of property, plant and equipment (1,914) 2,386 Long-term investment income (2) (30) Profit on disposal of long-term investments (17) (31) Profit on disposal of a jointly controlled entity (4) Write back of provision for diminution in value of long-term investments (222) Amortisation of intangible assets 11,752 12,120 Increase/(decrease) in net pension liabilities 2,354 (2,393) Operating profit before working capital changes 486, ,620 Increase in properties under development and for sale (12,611) (46,152) Increase in debtors and prepayments (54,691) (13,676) Increase in creditors and accruals 101,701 25,054 Cash generated from operations 520, ,

110 Notes to the Accounts 34. Notes to consolidated cash flow statement (Continued) (b) Analysis of changes in financing Capital redemption Share reserve Loans and capital and finance and contributed Minority lease US$ 000 premium surplus interests obligations* Total At 31st December , ,286 4, ,910 1,133,630 Changes in exchange rates Inception of finance leases 13,550 13,550 Minority interests share of profit Dividends paid to minority interests (470) (470) Net cash inflow/(outflow) from financing 3,600 (42,715) (39,115) At 31st December , ,286 7, ,190 1,108,251 Changes in exchange rates 7,735 7,735 Inception of finance leases 189, ,516 Repurchase of own shares (4,696) (55,043) (59,739) Minority interests share of profit Dividends paid to minority interests (255) (255) Net cash inflow from financing 20,671 20,671 At 31st December ,091 93,243 7,850 1,083,112 1,266,296 * Including bank loans repayable more than three months and within one year. (c) Analysis of cash and cash equivalents US$ Bank balances and deposits maturing within three months from the date of placement 551, ,640 Portfolio investments 108,165 54,276 Overdrafts and bank loans repayable within three months from the date of advance (15,050) (30,418) 644, ,

111 35. Subsequent event On 20th February 2004, the Company allotted and issued 47,000,000 new ordinary shares of US$0.10 each at an issue price of HK$25.75 per share for cash to be used for working capital and general corporate purposes of the Company. 36. Approval of accounts The accounts were approved by the Board of Directors on 19th March

112 Segment Information The principal activities of the Group include those relating to international transportation and logistics, container terminal, property investment and development. International transportation and logistics include global containerised shipping services in major trade lanes, covering Trans-Pacific, Transatlantic, Asia/Europe, Asia/Australia and Intra-Asia trades, and integrated services over the management and control of effective storage and flow of goods. In accordance with the Group s internal financial reporting and operating activities, the primary segment reporting is by business segments and the secondary segment reporting is by geographical segments. The business segment for international transportation and logistics includes the operations of the terminals at Long Beach and Kaohsiung, which form an integral part of that business. For the geographical segment reporting, freight revenues from international transportation and logistics are analysed based on the outbound cargoes of each geographical territory. The Directors consider that the nature of the international transportation and logistics activities, which cover the world s major shipping lanes, and the way in which costs are allocated precludes a meaningful allocation of operating profit to specific geographical segments. Accordingly, geographical segment results for international transportation and logistic business are not presented. Segment assets consist primarily of property, plant and equipment, other non-current assets, debtors and prepayments, and mainly exclude investments in securities. Segment liabilities comprise creditors, accruals and other non-current liabilities. Total assets and capital expenditure are where the assets are located. 110

113 Business segments Investments International and transportation corporate US$ 000 and logistics Terminal Property services Elimination Group Year ended 31st December 2003 Turnover 2,969, ,359 21,249 (23,049) 3,241,113 Other operating income 10, ,219 3,169 14,875 Segment results 325,308 35,034 6,228 (7,186) 359,384 Net financing charges (18,740) Share of profits less losses of jointly controlled entities (2,185) 14,847 12,662 Profit before taxation 353,306 Taxation (24,145) Profit after taxation 329,161 Minority interests (206) 89 (117) Profit for the year 329,044 Segment assets Property, plant and equipment 1,312, , ,146 1,579,798 Jointly controlled entities 2,777 21,521 24,298 Other assets 212,484 47, ,411 4, ,949 Unallocated assets 693,865 Consolidated total assets 2,754,910 Segment liabilities Minority interests (4,400) (3,450) (7,850) Other liabilities (464,669) (26,660) (4,300) (1,732) (497,361) Unallocated liabilities (1,138,945) Consolidated total liabilities (1,644,156) Capital expenditure 394,945 27,955 14, ,801 Depreciation 99,185 15, ,740 Amortisation of intangible assets 9, ,157 11,

114 Segment Information Business segments (Continued) Investments International and transportation corporate US$ 000 and logistics Terminal Property services Elimination Group Year ended 31st December 2002 Turnover 2,218, ,698 24,084 (15,950) 2,457,952 Other operating income 2, ,822 Segment results 78,399 11,856 8,023 (7,432) 90,846 Net financing charges (30,634) Share of profits less losses of jointly controlled entities (8,918) 11,608 2,690 Profit before taxation 62,902 Taxation (10,954) Profit after taxation 51,948 Minority interests (271) 61 (210) Profit for the year 51,738 Segment assets Property, plant and equipment 1,114, ,939 90,093 1,342,438 Jointly controlled entities 4,185 31,391 35,576 Other assets 170,661 39, ,744 5, ,535 Unallocated assets 425,791 Consolidated total assets 2,189,340 Segment liabilities Minority interests (4,449) (3,539) (7,988) Other liabilities (347,539) (40,812) (1,941) (1,998) (392,290) Unallocated liabilities (928,619) Consolidated total liabilities (1,328,897) Capital expenditure 70,839 18, ,873 Depreciation 89,571 12, ,948 Amortisation of intangible assets 10, ,402 12,120 Write back of provision for diminution in value of long-term investments (507) (222) 112

115 Geographical segments Operating profit before Total Capital US$ 000 Turnover financing assets expenditure Year ended 31st December 2003 Asia 2,043,205 (1,634) 450,080 37,230 North America 752,356 42, ,007 61,237 Europe 399,068 12, Australia 46, Unallocated* 318,122 1,871, ,817 3,241, ,384 2,754, ,801 Year ended 31st December 2002 Asia 1,445,558 2, ,118 5,813 North America 651,713 17, ,468 22,631 Europe 316,557 26,443 1,930 Australia 44, Unallocated* 70,967 1,421,977 59,478 2,457,952 90,846 2,189,340 89,873 * Operating profit before financing comprise of results from international transportation and logistics and investment activities whereas total assets, comprise of vessels, containers, portfolio investments and bank balances while capital expenditure comprise of vessels, containers and financing charges under intangible assets. 113

116 Principal Subsidiaries and Jointly Controlled Entities As at 31st December 2003 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries Beaufort Shipping Ltd shares of no par value Ship owning Liberia Worldwide US$5,000 Betterment International Ltd 100 5,000 shares of US$1 each Property investment British Virgin China US$5,000 Islands Cargo System Warehouse and 100 3,000 shares of HK$100 each Equipment owning Hong Kong Hong Kong Transport Ltd HK$300,000 Consolidated Leasing & share of no par value Equipment owning USA USA Terminals, Inc. US$100 and leasing Containers No. 1 Inc shares of no par value Equipment owning Marshall Worldwide US$5,000 and leasing Islands Croydon Investment Ltd shares of no par value Investment holding Liberia Worldwide US$5,000 Dongguan Orient Container Co Ltd 100 Registered capital Container depot China China HK$29,000,000 DT Ltd shares of no par value Investment Marshall Europe US$5,000 Islands Far Gain Investment Ltd shares of HK$1 each Investment holding Hong Kong Hong Kong HK$2 Global Terminal & Container ,750 shares of no par value Terminal operating USA USA Services, Inc. US$5,500,000 Goodlink Shipping Ltd shares of no par value Ship chartering Liberia Worldwide US$5,000 Hai Dong Transportation Co Ltd ,000 shares of HK$1 each Container transportation Hong Kong Hong Kong HK$100,000 Hillingdon Steamship and shares of US$100 each Investment Bermuda Worldwide Navigation Company Ltd US$20,

117 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Howland Hook Container 100 1,000,000 common stock Terminal operating USA USA Terminal, Inc. of US$1 each 100 5,200 cumulative preferred stock of US$1,000 each US$6,200,000 Island Securing and Maintenance, Inc ,000 shares of no par value Lashing and USA USA US$10,000 maintenance of container equipment Joyocean Navigation Ltd shares of no par value Ship chartering Liberia Worldwide US$5,000 Kenwake Ltd 100 1,600,000 shares of 1 each Investment holding United United ,000 5% cumulative Kingdom Kingdom preference shares of 1 each 2,120,000 Laronda Company Ltd 100 5,000 shares of US$1 each Portfolio investment British Virgin Worldwide US$5,000 Islands Long Beach Container Terminal, Inc ,000 shares of no par value Terminal operating USA USA US$500,000 Longtex Investment Ltd shares of HK$1 each Investment holding Hong Kong China HK$2 Loyalton Shipping Ltd shares of no par value Ship owning Marshall Worldwide US$5,000 Islands Millerian Company Ltd 100 5,000 shares of US$1 each Portfolio investment British Virgin Worldwide US$5,000 Islands Newcontainer No. 1 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No. 2 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,

118 Principal Subsidiaries and Jointly Controlled Entities Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Newcontainer No. 3 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No. 4 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No. 5 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No. 6 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No. 7 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$5,000 Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands 116

119 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Newcontainer No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands OHKL (Macau) Ltd quotas of MOP1,000 each Liner agency Macau Macau MOP50,000 OOCL (Asia Pacific) Ltd shares of HK$1 each Liner territorial office Hong Kong Asia Pacific HK$2 OOCL (Assets USA) Holdings Inc ,000 shares of US$1 each Investment holding Liberia USA US$50,000 OOCL (Assets) Holdings Inc shares of no par value Investment holding Liberia Worldwide US$5,000 OOCL (Australia) Pty Ltd ,000 shares of A$1 each Liner agency Australia Australia A$200,000 OOCL (Benelux) NV ,271 shares of no par value Liner agency Belgium Belgium 609,799 OOCL (Canada) Inc ,000 shares of no par value Liner agency Canada Canada C$91,000 OOCL (China) Investment Ltd shares of HK$1 each Investment holding Hong Kong China HK$2 OOCL (China) Ltd shares of HK$1 each Representative office Hong Kong China HK$2 117

120 Principal Subsidiaries and Jointly Controlled Entities Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) OOCL (Deutschland) GmbH 100 Registered capital Liner agency Germany Germany 130,000 OOCL (Europe) Ltd 100 5,000,000 shares of 1 each Investment holding and United Europe 5,000,000 liner territorial office Kingdom OOCL (Finland) Ltd Oy shares of each Liner agency Finland Finland 2, OOCL (France) SA ,000 shares of each Liner agency France France 914, OOCL (HK) Ltd shares of HK$100 each Liner agency Hong Kong Hong Kong HK$50,000 OOCL (India) Private Ltd 100 1,000 shares of Rs100 each Liner agency India India Rs100,000 OOCL (Ireland) Ltd shares of 1.25 each Liner agency Ireland Ireland 125 OOCL (Japan) Ltd ,000 shares of Liner agency Japan Japan Yen500 each Yen80,000,000 OOCL (Korea) Ltd ,000 shares of Liner agency Korea Korea Won10,000 each Won160,000,000 OOCL (Liners) Holdings Ltd shares of HK$1 each Investment holding Hong Kong Hong Kong HK$2 OOCL (Logistics) Holdings Ltd shares of US$1 each Investment holding British Virgin Worldwide US$2 Islands OOCL (Philippines) Inc ,000 class A common Liner agency Philippines Philippines stock of Peso100 each ,000 class B common stock of Peso100 each Peso2,500,

121 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) OOCL (Russia) Ltd participatory share of Liner agency Russia Russia Rub10,000 each Rub10,000 OOCL (Scan-Baltic) A/S 100 1,000 shares of Liner agency Denmark Northern Europe DKK500 each DKK500,000 OOCL (Singapore) Pte Ltd ,000 shares of S$1 each Liner agency Singapore Singapore S$100,000 OOCL (Taiwan) Co Ltd ,000,000 shares of Liner agency Taiwan Taiwan NT$10 each NT$100,000,000 OOCL (Thailand) Ltd ,000 shares of Baht100 each Liner agency Thailand Thailand Baht4,000,000 OOCL (UK) Ltd 100 1,100,000 shares of 10 each Liner agency United United 11,000,000 Kingdom Kingdom OOCL (USA) Inc ,030 shares of US$1 each Liner agency USA USA US$1,030 OOCL China Domestics Ltd 100 Registered capital Freight agency and China China RMB21,250,000 cargo consolidation OOCL Logistics (Asia Pacific) Ltd shares of US$100 each Investment holding, Bermuda Asia Pacific US$20,000 transportation and logistics OOCL Logistics (China) Ltd 100 Registered capital Logistics, cargo China China US$3,400,000 consolidation and forwarding OOCL Logistics (Europe) Ltd shares of 1 each Logistics, cargo United Europe 2 consolidation Kingdom and forwarding 119

122 Principal Subsidiaries and Jointly Controlled Entities Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) OOCL Logistics (Hong Kong) Ltd ,000 shares of HK$10 each Logistics, cargo Hong Kong Hong Kong HK$500,000 consolidation and forwarding OOCL Logistics (Japan) Ltd shares of Yen50,000 each Logistics, cargo Japan Japan Yen10,000,000 consolidation and forwarding OOCL Logistics (Korea) Ltd ,000 shares of Logistics, cargo Korea Korea Won10,000 each consolidation Won300,000,000 and forwarding OOCL Logistics (Singapore) Pte Ltd shares of S$1 each Logistics, cargo Singapore Singapore S$2 consolidation and forwarding OOCL Logistics (Taiwan) Ltd ,000 shares of NT$10 each Logistics, cargo Taiwan Taiwan NT$7,500,000 consolidation and forwarding OOCL Logistics Inc shares of no par value Logistics, cargo USA Worldwide US$200 consolidation and forwarding OOCL Shipping BV ordinary shares of Ship management Netherlands Worldwide 150 each and chartering 90 cumulative preference shares of 150 each 18,000 OOCL Ships (Marshall Islands) Ltd shares of no par value Ship chartering Marshall Worldwide US$5,000 Islands # OOCL Transport & Logistics ,477,152 shares of Investment holding Bermuda Worldwide Holdings Ltd US$1 each US$169,477,152 # OOIL (Investments) Inc shares of no par value Investment holding Liberia Worldwide US$5,

123 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Orient Container No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Orient Container No shares of no par value Ship owning Marshall Worldwide (Marshall Islands) Shipping Inc. US$5,000 Islands Orient Container No. 4 Shipping Inc shares of no par value Ship owning Liberia Worldwide US$100 Orient Overseas (Shanghai) 100 Registered capital Investment holding China China Investment Co Ltd US$44,250,000 Orient Overseas Associates 100 Limited partnership Property owning USA USA Orient Overseas Building Corp shares of no par value Property owning USA USA US$150,000 Orient Overseas Container Line Inc shares of no par value Investment holding Liberia Worldwide US$25,000,000 Orient Overseas Container Line Ltd ,000 shares of Containerised Hong Kong Worldwide HK$100 each transportation HK$1,000,000 Orient Overseas Container Line 100 Registered capital Liner agency China China (China) Co Ltd US$2,080,000 Orient Overseas Container Line ,000,000 shares of 1 each Investment holding United United (Europe) Ltd 66,000,000 Kingdom Kingdom Orient Overseas Container Line ,000 shares of M$1 each Liner agency Malaysia Malaysia (Malaysia) Sdn Bhd M$100,000 Orient Overseas Container 100 5,000 shares of US$1 each Containerised Cayman Worldwide Line (UK) Ltd US$5,000 transportation and Islands ship management # Orient Overseas Developments Ltd ,000 shares of HK$10 each Investment holding Hong Kong Hong Kong HK$100,

124 Principal Subsidiaries and Jointly Controlled Entities Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Orient Overseas Property 100 Registered capital Property development China China (Shanghai) Co Ltd US$2,100,000 Shanghai OOCL Container 60 Registered capital Container depot China China Transportation Co Ltd US$9,350,000 Shanghai Orient Overseas Yongye 88 Registered capital Property development China China Real Estate Co Ltd US$30,000,000 Soberry Investments Ltd 100 5,000 shares of US$1 each Portfolio investment British Virgin Worldwide US$5,000 Islands Surbiton Ltd shares of no par value Portfolio investment Liberia Worldwide US$5,000 Treasure King Shipping Ltd shares of no par value Ship chartering Liberia Worldwide US$5,000 TSI Terminal Systems Inc ,400 shares of C$1 each Terminal operating Canada Canada C$233,400 Wall Street Plaza, Inc A shares of US$1 each Investment holding USA USA B shares of US$1 each ,000 12% series A non-cumulative non-voting preferred stock of US$1,000 each ,000 11% series B non-cumulative non-voting preferred stock of US$1,000 each ,500 12% series C non-cumulative non-voting preferred stock of US$1,000 each ,000 12% series D non-cumulative non-voting preferred stock of US$1,000 each US$76,500,

125 Effective percentage held by Particulars of issued share Principal Country of Area of Name of Company Group and loan capital activities incorporation operations Subsidiaries (Continued) Wayton Ltd shares of HK$1 each Ship owning Hong Kong Worldwide HK$2 Wealth Capital Corporation shares of no par value Investment holding Liberia Worldwide US$5,000 Jointly controlled entities Hui Han Investment Ltd 50 1,000 shares of HK$1 each Investment holding Hong Kong China HK$1,000 Jointco Investment Ltd 50 1,000 shares of HK$1 each Investment holding Hong Kong China HK$1,000 Qingdao Orient International 59 Registered capital Container depot China China Container Storage & RMB69,900,000 Transportation Co Ltd Shanghai Orient Overseas Xujiahui 47.5 Registered capital Property development China China Real Estate Co Ltd US$10,000,000 # Direct subsidiaries of the Company. Companies incorporated in Liberia but redomiciled to the Marshall Islands. 123

126 Major Customers and Suppliers Approximately 5.2% and 18.3% of the Group s total expenditure on purchases of goods and services for the year are attributable to the largest supplier and five largest suppliers respectively. Approximately 1.2% and 4.7% of the Group s total reported revenues for the year are attributable to the largest customer and five largest customers respectively. The Group has entered into slot sharing arrangements with other container shipping companies. The receipts and payments from slot sharing arrangements have not been included in determining the major customers and suppliers since it would be misleading to do so as the receipts and payments are in respect of sharing arrangements for the utilisation of vessel space. No director or any of his associates holds any equity interest in the suppliers or customers included above. 124

127 10 Years Financial Summary US$ Consolidated Profit and Loss Data Turnover 1,516,018 1,671,628 1,882,322 1,895,997 1,832,764 2,139,071 2,395,160 2,378,950 2,457,952 3,241,113 Operating profit before financing 119,543 91, ,447 68,033 48, , , ,391 90, ,384 Net financing charges (59,620 ) (21,038 ) (42,899 ) (42,471 ) (42,911 ) (41,421 ) (48,246 ) (45,614 ) (30,634 ) (18,740 ) Profit before taxation 60,106 70,579115,078 26,548 3,674 80, ,464 71,089 62, ,306 Profit after taxation 57,648 66, ,233 24, , ,477 61,80951, ,161 Preferred share dividends 9,097 9,097 9,003 4,875 2,564 Profit/(loss) attributable to ordinary shareholders 48,113 56,108 97,149 18,790 (2,867 ) 67, ,863 61,287 51, ,044 Per Ordinary Share Earnings/(loss) (US cents) (0.6 ) Dividends (US cents) Weighted average number of ordinary shares in issue ( 000) 460,369460,369462, , , , , , , ,534 Notes: (1) The estimated useful life of container vessels was revised from 20 years to 25 years in The depreciation of container vessels prior to 1998 has not been restated to reflect the change. (2) The accounting policy on dry-docking and special survey costs was changed in 1997 and again in The figures prior to 1996 and 1999 respectively have not been restated to reflect this change. (3) The accounting policy on pre-operating costs was changed in 2000 and the figures prior to 1998 have not been restated to reflect this change. (4) The accounting policies on employee benefits and income taxes were changed in 2002 and the figures prior to 2000 have not been restated to reflect this change. 125

128 10 Years Financial Summary US$ Consolidated Balance Sheet Data Property, plant and equipment 672, , , ,807 1,042,076 1,006,412 1,286,197 1,365,378 1,342,438 1,579,798 Cash, portfolio and bond investments 419, , , , , , , , , ,806 Other net current liabilities (182,278 ) (193,422 ) (196,593 ) (252,718 ) (304,157 ) (327,047 ) (346,574 ) (343,659 ) (341,356 ) (471,895 ) Gross assets 1,336,618 1,565,905 1,776,737 1,871,842 1,800,625 1,862,864 2,155,254 2,150,284 2,189,340 2,754,910 Long-term debt 405, , , , , , , , , ,677 Total long and short-term debt 494, , , , , , , , ,608 1,098,162 Net debt 75, , , , , , , , , ,356 Shareholders funds 560, , , , , , , , ,443 1,110,754 Ordinary shareholders funds 460, , , , , , , , ,443 1,110,754 Other Financial Information Depreciation 75,646 73,827 83,139 75,364 65,590 69,544 84,118 88, , ,740 Capital expenditure 97, , , ,785 95,077 46, , ,353 89, ,801 Consolidated Financial Ratios/Percentages Debt to equity ratio Net debt to equity ratio Return on average ordinary shareholders funds (%) (0.4 ) Accounts Payable as a % of turnover Accounts Receivable as a % of turnover Net asset value per ordinary share (US$)

129 Fleet and Container Information Fleet The following table sets out the Group s vessels deployed in all its services at 31st December DATE SERVICE TEU SERVICE IN PLACED IN SPEED IN VESSEL NAME CAPACITY OWNERSHIP WHICH USED SERVICE KNOTS FLAG OOCL France 5,560 Chartered Trans-Pacific Liberia OOCL Germany 5,560 Chartered Trans-Pacific Liberia OOCL New York 5,560 Chartered Trans-Pacific Liberia OOCL Singapore 5,390 Owned Trans-Pacific Hong Kong OOCL America 5,344 Owned Trans-Pacific Hong Kong OOCL Britain 5,344 Owned Trans-Pacific Hong Kong OOCL California 5,344 Owned Trans-Pacific Hong Kong OOCL China 5,344 Owned Trans-Pacific Hong Kong OOCL Hong Kong 5,344 Owned Trans-Pacific Hong Kong OOCL Japan 5,344 Owned Trans-Pacific Hong Kong OOCL Friendship 3,218 Chartered Asia-USEC Hong Kong OOCL Fair 3,161 Owned Asia-USEC Hong Kong OOCL Faith 3,161 Chartered Asia-USEC Hong Kong OOCL Montreal 4,402 Chartered Transatlantic Hong Kong OOCL Fortune 3,161 Owned Transatlantic Hong Kong OOCL Belgium 2,808 Owned Transatlantic Hong Kong OOCL Shenzhen 8,063 Chartered Asia-Europe Hong Kong OOCL Long Beach 8,063 Chartered Asia-Europe Hong Kong OOCL Chicago 5,714 Owned Asia-Europe Hong Kong OOCL San Francisco 5,714 Owned Asia-Europe Hong Kong OOCL Korea 5,560 Chartered Asia-Europe Liberia OOCL Los Angeles 5,560 Chartered Asia-Europe Liberia OOCL Malaysia 5,560 Chartered Asia-Europe Liberia OOCL Shanghai 5,560 Chartered Asia-Europe Liberia OOCL Thailand 5,560 Chartered Asia-Europe Liberia OOCL Netherlands5,390 Chartered Asia-Europe Hong Kong OOCL Freedom 3,161 Chartered Asia-Europe Hong Kong OOCL Fidelity 3,161 Owned Asia-Europe Hong Kong OOCL Sydney 2,762 Chartered Asia/Australia Singapore OOCL Melbourne 2,762 Chartered Asia/Australia Hong Kong OOCL Envoy 2,544 Owned Asia/Australia Hong Kong OOCL Exporter 2,535 Owned Asia/Australia Hong Kong OOCL Neva 868 Chartered Intra-Europe Germany OOCL Nevskiy 868 Chartered Intra-Europe Germany OOCL Norppa 822 Chartered Intra-Europe United Kingdom OOCL Narva 660 Chartered Intra-Europe Germany Mare Caspium 2,959 Chartered Intra-Asia Antigua OOCL Harmony 2,959 Chartered Intra-Asia Antigua OOCL Osaka 2,762 Chartered Intra-Asia Panama OOCL Xiamen 2,762 Chartered Intra-Asia Panama Wehr Havel 2,526 Chartered Intra-Asia Marshall Island Torge S 2,450 Chartered Intra-Asia Hong Kong OOCL Ability 1,560 Chartered Intra-Asia Panama OOCL Acclaim 1,560 Chartered Intra-Asia Panama OOCL Ambition 1,560 Chartered Intra-Asia Panama OOCL Authority 1,560 Chartered Intra-Asia Panama Sinar Batam 1,560 Chartered Intra-Asia Panama Jock Rickmers 1,216 Chartered Intra-Asia Marshall Island Carla Rickmers 1,216 Chartered Intra-Asia Marshall Island Blue Moon 614 Chartered Intra-Asia Liberia Tokyo Glory 588 Chartered Intra-Asia Panama OSG Alpha 585 Chartered Intra-Asia St Vincent & the Grenadines Sea Breeze 502 Chartered Intra-Asia Gibraltar OOCL Kyushu 455 Chartered Intra-Asia Bahamas OOCL Seto 455 Chartered Intra-Asia Bahamas TOTAL 55 VESSELS 184,781 Container Information The Group owned, purchased on finance lease terms or leased under operating lease agreements 253,558 units (420,004 TEU) at 31st December Approximately 60% of the container fleet in TEU capacity at 31st December 2003 was owned or purchased under finance leases with the remainder leased under operating lease agreements. In addition, at 31st December 2003 the Group owned, purchased on finance lease terms or leased under operating lease terms 25,908 trailer chassis. 127

130 Terminal Information TSI TERMINAL SYSTEMS INC. VANTERM Location: Vancouver, British Columbia, Canada. Status of Terminal: A 76 acre, four berth container terminal facility operated under a longterm lease agreement with the Vancouver Port Authority, which has been extended to Equipment/Facilities: Two container berths, 619 metres long; two conventional berths, one 90 metres long and one 83 metres long; on-dock intermodal yard consisting of five tracks totaling 2,200 metres; 9-lane inbound and 3-lane exit gate; closed circuit TV cameras via Internet to monitor truck lane traffic; five cranes including four post-panamax at 16-wide and one Super post-panamax at 18-wide; 12 RTGs capable of one container over 4x7 wide; seven toppicks, one reachstacker; 10 empty handlers (sidepicks); 34 yard tractors; 43 yard chassis; various lift trucks and truck scale; reefer points with 288 reefer outlets. Building Facilities: 25,000 sq ft maintenance building and modular operations building. The Vancouver Port Authority has commenced an expansion of Vanterm s container capacity by removing a 125,000 sq ft transit shed and 30,000 sq ft main office complex. Principal Customers: K Line, OOCL, NYK, COSCO, Hapag Lloyd, P&O Nedlloyd, Yang Ming, Hanjin. DELTAPORT Location: Roberts Bank, Delta, British Columbia, Canada. Status of Terminal: A 160 acre, two berth container facility in which TSI is a service contractor to the Vancouver Port Authority until 31st December 2003, and thereafter under a longterm lease agreement with Vancouver Port Authority for Equipment/Facilities: Two container berths, 670 metres long; eight rail tracks of 3,500 ft each, providing capacity for four 7,000 ft double-stack trains (440 TEUs per train); grounded storage capacity in the Intermodal Yard of approximately 1,200 TEUs; five high-speed railmounted gantries (RMGs) equipped with a computerised container positional determination system; radio data controlled inbound and exit gate; closed circuit TV cameras via Internet to monitor truck lane traffic; six Super post-panamax container gantry cranes capable of handling 18 to 20 container wide ships each with 50-tonne capacity; 16 rubber tire gantries (RTGs), some equipped with auto-steering and a positional determination system; abundant supply of multi-trailer systems (triples) and single chassis; 14 reachstackers/toplifts, 10 empty handlers; two truck weigh scales; 24,000 TEUs storage capacity; 600 reefer plugs. Building Facilities: 33,300 sq ft main office building; 22,000 sq ft maintenance building. Principal Customers: Evergreen, Lloyd Triestino, China Shipping, NYK, OOCL, P&O Nedlloyd, Hapag Lloyd, Norasia, Zim, CMA-CGM.

131 LONG BEACH CONTAINER TERMINAL, INC. Location: Long Beach, California, USA. Status of Terminal: A 104 acre, three berth container terminal facility operated under a long-term preferential use agreement from the Port of Long Beach, which expires in Equipment/Facilities: Three container vessel berths; five post-panamax quayside container gantry cranes; eight rubber-tired gantry cranes; 60 yard tractors; three top handlers; six side picks; 12 utility forklifts; 26 yard chassis; various pick-up trucks and other vehicles and handling equipment. Building Facilities: 13,000 sq ft main office building; 3,200 sq ft marine operations building; 9,600 sq ft repair shop. Principal Customers: OOCL, NYK, P&O Nedlloyd, Hapag Lloyd. GLOBAL TERMINAL & CONTAINER SERVICES, INC. Location: Jersey City, New Jersey, USA. Status of Terminal: A freehold 98.2 acre, two berth container facility. Equipment/Facilities: 20 receiving/delivery gates; closed-circuit television system through-out the Terminal for security and monitoring of operations; two deep water container vessel berths (1,800 ft); six quayside container cranes including four Super post-panamax cranes; ten rubber-tyred gantry cranes (RTG s) capable of stacking one over five containers high and six wide plus a truck lane. All RTG s are equipped with global positioning systems for steering and live-time container locations; 44 yard tractors; seven toploaders; four side pickers; 24 yard chassis; various terminal vehicles for use by terminal supervision. Building Facilities: 28,000 sq ft administration building; 4,000 sq ft marine operations building and 25,000 sq ft maintenance and repair building. Principal Customers: NYK, Hapag Lloyd, P&O Nedlloyd, OOCL, Columbia Coastal Transport, The United States Military Traffic Management Command. 129

132 Terminal Information HOWLAND HOOK CONTAINER TERMINAL, INC. Location: Staten Island, New York, USA (Port of New York / New Jersey). Status of Terminal: A 187 acre, three berth container terminal facility operated under a long-term lease agreement from the Port Authority of New York and New Jersey, which expires in Equipment/Facilities: Three deep water container vessel berths; six quayside gantry cranes; four new post-panamax cranes to be delivered first quarter 2004; 24 paperless computerised truck gates; 63 yard tractors; 22 full container handlers; 9 empty container handlers and other heavy forklifts; 42 stevedoring chassis; various computer equipped pickups and other vehicles; on-dock rail service (37 acre intermodal rail yard under construction); on-dock Container Freight Station; on-dock US Customs Inspections; Trac operated chassis pools of 1,700 chassis. Building Facilities: 39,000 sq ft main office building, 412,000 sq ft container freight station (comprising two buildings), 28,785 sq ft equipment maintenance and repair shop, 20,000 sq ft deep freeze warehouse, 66,000 sq ft refrigerated warehouse. Principal Customers: Grand Alliance (NYK, Hapag Lloyd, P&O Nedlloyd, OOCL), New World Alliance (APL, MOL, Hyundai and Evergreen), Chilean Lines/CSAV, CCNI, Hamburg Sud, Turkon Container Line, CMA-CGM, Ecuadorian Line and The United States Military Traffic Management Command. KAOHSIUNG CONTAINER TERMINAL Location: Pier Kaohsiung Harbour, Kaohsiung, Taiwan. Status of Terminal: One of the original container facilities from the Kaohsiung Harbour Bureau. Current lease expires in The entire terminal was recently modernised to have deep-water berths of 14.5 meters, newly installed light towers, wireless lane network and fiber optics, state-of-art new rail-mounted gantry cranes and quay cranes, revised yard layout. 130 Equipment/facilities: Two container vessel berths (680 meters long) on a total of 66 acres. Operate on 24-hour 7-day basis for all berth and gate activities. Equipment include: Six post-panamax quay cranes including three with 18 rows; 12 rail-mounted gantry cranes (RMGs); six straddle carriers; six empty stackers and various shipside handling equipment. Building Facilities: 1,500 sq m main office building, 7,000 sq m CFS, 2,200 sq m maintenance building. Principal Customers: ANL, COSCO, China Shipping, Hapag Lloyd, Malaysia International Shipping Co, NYK, OOCL, P&O Nedlloyd.